Business, Macroeconomy, Microeconomy, Spain, Thoughts

House bubble… again. Time to burst already?

If you are one of the few people that read me (thank-you by the way) you’ll probably remember the post I wrote about the Spanish house bubble about to burst. Well, there are signs that its bursting is closer now.

In fact many European countries now fear that this burst could be contagious. Probably it will be.

Did I tell you about a constructor, Fernando Martin, and how he was paying above risk-free interest rates four times than what an American constructor would? Well, the markets are going down for real estate companies, and their shares are losing ground. Looks like there’s something changing, moving down.

For a country like Spain that has grown a lot based on house building, this is a big problem.

Many of these companies have been buying around: utilities, construction, airports. Many have just bought each other. Some with their own shares, but when that wasn’t enough, with fresh cash.

Where do you get fresh cash from when you need it? Well, institutional investors, banks… there are many ways. If you can do a leveraged buy out, or just go into debt, do it. Why would you pay with your own money when you can borrow at low rates and achieve higher returns? Sounds silly.

But there comes a time when you have to repay. And no gain comes without risk. Right now the prices may go down, but debt will stay the same. That means that companies will still need to sell at the same pace. Pressure to sell means pressuring the prices down.

But now there’s a wider gap between offer and demand, a gap still getting wider. Now it won’t be so easy to repay debt. The weak are in peril, with value going down and risk going up. That means trouble.

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Astroc going up, up, up… and now down

Real state companies owe 250 billion € to the Spanish financial system. That is one fourth of the gross national product. The risk naturally spreads into banks. And they also had the risk of lending to subprime consumers, remember? Add both risks and the situation, naturally, gets more risky. Add the correlation between them and then it gets even more risky.

Nothing radical has changed from some days ago. Only investors mindsets. But investors are like that: either they hate you or they love you, sometimes enthusiastic, sometimes they just panic. No inbetweens.

But what do we need to see prices fall? Just a price-falling mindset. It’s all in our minds.

Do not panic yet. If real state companies have trouble to repay the banks still have the guarantees. They can still sell them. But in most cases the guarantees are their own plunging shares. They may be worth less than they owe, they can’t even be sold without pressuring prices down more. Ooopss.

(Fortunately, there’s more to Spain than the real state sector, and the Spanish financial sector is very strong. Moody’s still keeps our AAA… for now.)

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