How timely it is to be reminded that dangerously inflated markets do not last forever. In the past few days, Spanish real estate has exhibited all the signs of a bursting bubble. While unfortunate for the owners of Spanish homes and property stocks, a popping sound should focus the minds of all investors in risky assets.
The speed of such corrections is always humbling. A week ago, developer Astroc Mediterraneo was the darling of the sector, trading at €45 per share. On Tuesday, following financing concerns, its share price is just €16. Amazingly, this still equates to a forward price/earnings multiple of 20 times. The sell-off in real estate has now spread into the local construction and banking sectors too. It will be interesting to watch whether investor panic travels to other pockets of property irrationality across Europe and beyond.
The Spanish real estate boom has left others in the shade. Average prices have doubled since 2000, spurring housing starts to record levels. An already heady love of property has been boosted by rising incomes, immigration and demographics as well as low interest rates. Spanish banks have also been willing lenders: in the past three years, banking credit to property developers has grown more than 40 per cent per year. Today, 24 per cent of total loans by deposit institutions are to construction and property development firms despite the fact that they contribute only 11 per cent of output. In the UK – no stranger itself to real estate excess – such loans come to just 13 per cent.
As a consequence, Spanish household debt is now about 120 per cent of gross domestic product. Supply is outpacing demand and foreign investment is declining. Interest rates are also beginning to bite. There is, therefore, little chance of the bubble reflating should European rates rise futher from here.
