Spain is perhaps the most perplexing of the recent housing bubbles. During the long boom, the Iberian peninsula was littered with speculative building projects. Construction peaked at a massive 18 per cent of GDP. The ratio of Spanish house prices to disposable income climbed from 3.8 times in the late 1990s to 7.7 times by 2007. Yet despite the severity of the financial crisis, which has driven unemployment to more than 20 per cent, the residential real estate market has proved remarkably resilient.
Edward Chancellor, FT.com, October 3, 2010.
Farbeit from this writer, olive grower observing from deep within the entrails of the Cro-magnonic Spanish province of Jaén that he is, to pretend to criticize the analysis of a member of the asset allocation team of one of the world's most prestigious investment managers, but perhaps someone with a bit more visibility might inform Edward Chancellor that he is mistaken in his calculation.
1). It is the total cost of home ownership that has to be measured against income, not merely the purchase price. Increase by 50 percent, minimally, US housing prices to arrive at a figure comparable to Spain, for example;
2). The 20 percent unemployment rate is as near irrelevant to the matter as is possible. Of the jobless in Spain, 83 percent of the increase in their numbers since the end of the boom are comprised of workers who were never in the housing market. The temporarily employed were never eligible for mortgages. The two-thirds who were, and are, have seen their numbers shrink by 3 percent over the same period.
On the plus side, however, Mr. Chancellor's editorial is the first (to our knowledge) to admit in a widely read English language source to the possibility that Spanish home prices did not collapse. The journey of a thousand mile begins with a single step.
Hat tip to Paul Kedrosky whom we have inevitably intended to illuminate (only employing a small amount of exagerration in the process) via his comments section.
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8 Comments:
While not eligible for mortgages, surely the temporarily employed were in the housing market to the extent that they were not actually sleeping in the streets?
I don't know. I didn't own a house in my life until was 48 years old. Never slept one night in the street, either.
My point is that renting is a valid form of being in the housing market. The demand for rental units impacts the overall demand on housing construction.
Sure, it would add to demand.
Even if the Spanish housing market has not collapsed, 7.7 income-to-price ratio is still a stretch for many, when other basic living expenses have also increased relative to income. While the market may/have not collapse/d, long-term stagnation would would seem to be inevitable.
That's probably true, but places along the Med and certain bedroom communities just a little too far from Madrid are going to take the brunt of that.
It surely follows that, if houses are now priced well relative to incomes (take the 7.7 times in the piece), they were ridiculously cheap ten years ago, at half the relative price, and probably even more 20 years ago. Rather than a bubble, what we had was historical mispricing in the past. Yet I cannot buy this line of reasoning. Something has to give somehow at some point. If I only knew what.
Anon - I don't think I've actually said that they're priced well - although you can argue that an economy that can move nearly 1 house for every 100 residents of all ages per year during a serious recession is not complaining too much about the cost. That's a cultural thing which would use your example of 20 years ago as proof that housing is a better long-term investment than money.
My whole and only point is that the comparison of house price to income is totally inadequate as a measure of fair pricing. Total home ownership costs paint a more complete picture.
Your point about 'historical mispricing' (which is possible) is beautiful, btw. It's easy to forget that we're always dealing with a comparison of two data points.
Cheers
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