Tuesday, June 12, 2007

Spanish housing, a precursor to the U.S. market?

Will the 'ghost town' development strategy push Spain into a house price crash? Madrid - Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see...
"We came to look at apartments but found ghost towns," said
Usua, a taxi driver. "You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe, so we turned around and left."

The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the housing ministry started keeping records.

Spanish home prices have more than doubled since 1998, exceeding growth rates in the UK and Ireland, Europe's fastest-growing markets.

The increase has been driven by a drop in interest rates from about 15 percent to less than 3 percent as Spain adopted the euro, household incomes swelled as women joined the workforce, and northern Europeans, mainly Germans and Britons, caused a surge in vacation home purchases.

As prices start to decline, homeowners may face the same challenges as buyers in the US, which is in the second year of a housing slump. Falling prices may spur higher delinquencies as buyers face difficulty refinancing.

I read before that up to 3 million homes stood empty in Spain, held by speculators in one of the largest property bubbles by scale in the world. Now the chickens are coming home to roost as Spain’s economy is drifting into trouble at the same time as their housing market is skidding to a halt.

Could this happen in the U.S.? Yes. In fact a flavor of this ‘Ghost Town’ effect has already been seen in California with new subdivisions nearly empty except for the occasional abandon car, broken house windows and graffiti. I’m sure that Spain’s housing market will fall faster than that of the U.S. so it bears watching to get of taste of what is in store.


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