Property bubble fears weigh on Spanish recovery

 

Knock-down home prices, idle cranes and builders forced to retrain for new jobs: despite sliding prices the spectre of a Spanish property bubble is hurting a fragile economic recovery.

The new labour minister, Valeriano Gomez, summed it up when he took over at the end of October: "Three out of four jobs lost in the crisis are in construction and related sectors."

Spain has the euro zone's highest jobless rate at about 20 percent.

All-out building in suburbs, the country and especially on the coast was the engine of the economy in the past decade.

"In the last eight years, two thirds of the homes built in Europe were in Spain," said Christian Palau, director of the online real estate advertising site Fotocasa.

From 2000, Spain built about 700,000 homes a year, as many as in France, Germany and Britain combined, until the 2008 glut pricked the bubble, with a price slump and a slew of property developer bankruptcies.

Recently, the market appeared to regain some health. Sales leapt 30 percent in August and prices in the third quarter of this year only dropped 3.4 percent from a year earlier, according to official data.

Many buyers are taking the plunge to take advantage of a home purchase tax deduction, which expires December 31.

But the frenetic activity should not hide an accumulated stock of housing, with about 1.5 million new and older homes unsold. It is estimated that 16 percent of Spanish homes are vacant, a record for Europe.

No surprise then that Banesto bank launched in mid-October an unprecedented program slashing the cost of 600 homes across Spain to 50 percent of the market price.

Because the real problem is that property prices, even after dropping 25 percent since 2007, must fall further.

The British weekly The Economist calculated recently that Spanish properties remained 46.7 percent overpriced. The European Commission estimates they are overpriced by 17 percent.

"We are no longer in a bubble" said Jose Luis Suarez, professor at Madrid's IESE Business School de Madrid. "But that does not mean that prices cannot decline further."

The building and public works sector is on pause waiting for the market to take off again. "You only have to look at the number of homes in construction, about 100,000 this year. You could almost say there is no building activity this year" said Suarez.

"This slump to record lows has consequences for employment" he stressed, since the sector has been a huge employer over the years.

The result is that construction industry workers, most without formal qualifications, are out of work, and it will cost a lot to replace them, said Fotocasa's Palau.

Meanwhile the country, whose economy stalled with zero growth in the third quarter according to preliminary figures, has to decide "what to do" and in which area to stake its future, Palau said.

Besides idle building sites, many finished homes lie empty in "ghost districts": "They promised (buyers) that there would be shops, public transport, schools, but with the crisis the property developers left."

The solution, he said, could be greater support to the rental market, a poor cousin in a country where home-ownership is the common dream. Relying only on purchases, it could take 10-15 years to absorb existing stock, he said.