Yield Not

Although we can’t find the source, we recall a certain investment house research report that surfaced, receiving due widespread redistribution, in the spring which claimed that Spanish real estate prices still had a tremendous fall facing them because yields on residential property investments were still well below the norm for the industrialized world. Noting that the INE has released June house sale statistics which indicated a continued stagnation of the market at around 37,000 units a month (450,000 a year, 1 per 100 Spanish residents per year – to save the reader the bother), and that the valuation company TINSA claims that prices maintain their slow descent at about four percent annually, this might be the moment to put to rest that deficient and less than useful analysis.

Not that the writer of that piece is factually mistaken – the yield on property investments in this country, outside of certain large cities, is absolutely miserly and rare are the places in which rents will actually cover an 80 percent mortgage on a home. On the other hand, one would think that this same state of affairs would result in a vibrant rental market but, unfortunately, Spaniards do not arbitrage one against the other because the calculation – if that is what it is – made here is not based on squaring the books on a monthly basis but by way of a long term comparison of the perceived qualities of money and property. The latter wins hands down with certain very real, though not specifically quantifiable, effects on the real estate market.

In a property crash:

1). Demand reappears at higher price levels than the experience of many other countries would predict;

2). Real, serious supply, being the perceived need or desirability to convert to cash, does not find its way to the market*.

Readers who might have difficulty wrapping their heads around this might try imagining the gold market were it dominated by Wyoming bunker dwellers and other compulsive hoarders of Spam and Argentine bully beef. Or, searching for an example less on the fringe of reasoned discourse, the current negative yield on certain American inflation-linked bonds – TIPS, for the unitiated – might fit the bill.

*Sensing that someone might come out snapping at this assertion, the writer wishes to make it clear that 'inventory' and 'supply' are not identical concepts. Though the former may be a necessary condition for the latter to exist, it is far from sufficient.

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