Spanish economy and the real estate bubble

Finnish media seems to give a very one-sided view that all the Mediterranean countries (Greece, Italy, Spain, Portugal) are in the same squad. Media does not believe strongly enough to bring out that Spain is not coming down the Greek way. Spain does not have nearly the same situation as Italy or Portugal.

The economy of Spain is the fifth- largest in Europe and is one of the biggest in the world. During 2008- 2012 in Spain, the crisis was generated by long term loans, the building market crash and a severe increase of unemployment, which rose to 22.9% be December 2011. Nevertheless, in 2010, Spain’s public debt was still less than those in Britain, France or Germany.

Spanish staggering unemployment figures, more than 23% of the total workforce and 50% of young people, suggest it should be real shambles. When I lived in Valencia from January to September 2011, I was able to see the high unemployment rates, the victims and consequences of the streets was a lot of beggars, alcoholism, and pick-pocketing and street crime had increased. However, citizens do not destruct buildings, such was in Greece, and most of them enjoy life, eating out, drinking and watching football matches.

The important problem though, is the residential real estate bubble in Spain that saw real estate prices rise 201% from 1985 to 2007. House ownership in Spain is above 80%. In addition, tax regulation encourages ownership: 15% of mortgage payments are deductible from personal income taxes. Even more, the oldest apartments are controlled by non-inflation-adjusted rent-controls and eviction is slow, therefore discouraging renting.

As feared, when the speculative bubble popped Spain became one of the worst affected countries. According to eurostat, over the June 2007-June 2008 period, Spain has been the European country with the sharpest plunge in construction rates.

Most of the properties are bank owned, having already gone through the repossession process, and guide prices will be as much as 70% below peak prices. Successful bidders will be required to pay a refundable deposit of £1,000 which will secure the property for a period of ten days during which time they can choose to visit Spain to view the property at first hand and meet the bank to arrange their mortgage or alternatively the mortgage application and sales contract can be issued direct from the bank in question without the necessity of a visit.

Alicante, Torrevieja, Orihuela and Guardamar’s wealth is built mainly by British tourists; the British economic crisis has affected these areas. In these regions the value of homes has plummeted to the bottom levels. This will not be of concern in the Costa Blanca, the most popular region for Scandinavians to buy a new house, where construction has taken place in a moderate pace, which contributes to the value of housing as well as maintaining the high quality of retention.

Despite many price reductions, the majority of those with property for sale in Spain are refusing to lower the prices to a level that will ensure them a sale for Scandinavians. The sale of existing homes was down 34% in February compared with the previous year, according to Mark Stucklin of spanishpropertyinsight.com. It would seem that buyers are not willing to pay what vendors demand, and vice versa.

Nevertheless, Spain is one of the most appealing places to travel or reside for Finns, as climate, affordable prices and slow lifestyle are still dominating factors over the economic situation.

By: Kristina Kucher

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