“…few can contemplate the possibility that prices could come down and stay down. In Spain, after all, prices only go up and up, don’t they?”

That’s exactly what I’ve read (about what people don’t contemplate). Unlike yours, my information is only second hand, but the word seems to be that Spanish people have “great faith” in property, they won’t sell for less than the price they want, and really believe they’ll get it - sooner or later. Hmmm… does this work?

Others commented that “prices are moving sideways”, which I think means they aren’t moving at all.

How would you comment on this?

Is it really the severity of the booms and busts that is calling the euro into question or the range of perceived potential solutions. So withdrawal from the euro is seen as a solution where currency secession for Michigan is not while unemployed Germans are not be geared up to go build things on the Costa Brava and Italians are not yet ready to reform their property markets.

Well this is getting very anecdotal, but sometimes anecdotes are revealing.

Ms x is 30 ish, a biology graduate, works for a big pharmaceutical company, hates it, would love to live in the country and do something ‘different’ (really the houses, she thinks, are her ticket ‘out’ at some stage). She has no children, and spends significant time looking after her elderly father who lives alone.

She could be, in this sense, Ms España, since this profile (apart from all the houses) is very typical. Normally people of her age have one property, but with the mortgage being the biggest one they can possibly get. The relation of all this with Spain’s continuing ‘lowest-low’ fertility would be the subject of another post.

“but did she get those on borrowed money?”

The answer would be yes, but one at a time, increasing the mortgage with each new acquisition. Let me explain. In this case her boyfriend (I think he works in IT) is fairly useful ‘on the tools’, and the two of them enjoy nothing more than buying a semi ruin in some charming spot in the country, and restoring it bit by bit.

In a way, all of this is relatively harmless, and they enjoy themselves, so fine you would think. The only problem I see in a case like this is if they ever want to sell. I mean, who needs all these houses? As I keep pointing out Spain’s population is in long term decline. The immigration, as I am indicating is highly volatile and unstable, I see all these faces in the Barcelona metro every day, nothing is more obvious to me.

Most of the immigrants are working in ‘fragile’ situations, and the first serious downturn will give many of them big difficulties making ends meet. Some will undoubtedly stay long term, but only some.

Now back to Ms ‘x’. She has been borrowing money, and has some kind of flexible debt plan distributed over the properties and she draws down the money as she needs to spend it. So one day, if she has to pay a realistic rate of interest (by realitistic I mean what the Spanish economy can itself support) she will feel it.

I could cite the case of one of my best friends. He has three homes. The first is a fairly modest flat in Barcelona. What you need to realise is that as property values have risen steadily the capital values of the mortgages (again also thanks to Spain’s oversize inflation rate) has continually reduced in real terms. So when the debt on the main home was under control he bought a small ruin in the country (late 80s) and, since he also is quite ‘handy’ and enjoys it, he did all of this on a low cost basis. Again, nothing bad here. They use their country home and enjoy it.

But then in the late 90s he fell into the trap. He bought a third one. Again, the house itself wasn’t expensive, since it was in a small village, near the Costa Brava, but this one he didn’t really need. He bought it as an investment. His idea was to modernise the thing, rent it out to tourists, and one day to sell to pay for his retirement. The works have cost more than he imagined (this is a typical feature of the ‘boom’, anything to do with construction has now become much more expensive), and he is now leveraged as high as he can go.

This is not an uncommon case. Every one who thinks about the problem seriously knows that Spanish state pensions have an uncertain future. This is one of the ‘pragmatic’ reasons why so much immigration is accepted so esily. He is in his early fiftees, he and his wife hate their jobs, and they would love nothing more than to take early retirement, but now I think this is going to be difficult.

Really I have stopped talking with him about all this long ago, it only used to depress him. He is quite heartened by the seeming ‘recovery’ in Japan. I think if Japan’s recovery turns out one more time not to be sustainable this will have an important impact on a lot of people here in Europe.

Now here’s another example (I could go on and on). A girl in her late 20s. She is a colleague of Ms x and is expecting her first child. She and her partner have decided that they are undercapitalised, and want to sell their Barcelona home to go and live in a much more expensive property outside the city. The thing is, she has paid a deposit on the new home, but has to wait a year before it is built and she can sell her existing one. She thinks there is no risk here, since she imagines that the value of her existing property will simply rise and rise. If, however, the boom were to end before she sells, she would be caught in the most vicious of vicious traps.

One last case. Someone I know who knows something of economics. He is Basque, and has money. He sometimes writes economic comment for the newspaper El Pais. He had three flats in Barcelona, but when he realised that nothing is forever, and that at some stage all this might blow, he sold them all (about a year ago) and went off and bought some property in Peru. He is more or less looking to the future with confidence.

“it seems many mortgages in Spain are variable rate.”

Oh yes, nearly all of them are.

I’m sorry if I have gone on at length, but maybe these examples can give you a bit better insight in to what is really happening here. The key point is that many people are now ‘uneasy’ about the situation, but few can contemplate the possibility that prices could come down and stay down. In Spain, after all, prices only go up and up, don’t they?

Edward, I realise you probably didn’t ask, but did she get those on borrowed money? If so, it’s a good job rates are low (for now). Wandering around German property sites, it seems many mortgages in Spain are variable rate. (And approx. 1,5 million dwellings in Spain are empty, 20% in some places).

But you may have asked is she was worried about the bubble. If so, what did she say?

Frankly I don’t think this is a useful comparison. The rust belt is, well, rusting. But it is only one part, a declining part, of a more or less vibrant US economy. Italy and Germany are in some sort of decline, period. Spain is booming, but too much so, this is a different problem, at least at the moment it is.

Italy clearly has real problems but is it plausible that they would be relieved by exiting the euro? The exit would surely be painful and without other barriers the controllers of the new lira might find less room to manouvre and less influence than is presumed. Surely the right thing for Italy is to sort out its property market and grasp its destiny as the Florida of Europe.

The €500 note is surely a step towards US style levels of seignorage benefits and it seems that the ECB has already failed to make a knee jerk response to the M3 figure.