Spain in Crisis

Just over a decade ago Argentina spectacularly unraveled with the biggest default in history: $100 billion. Savings were wiped out. Banks were set alight and locals took to the streets and balconies banging pots and pans in a peaceful display of disgust.

That crisis created the biggest buying opportunity of a decade. There was a fire sale of high-end historic apartments.

Of course, the anatomy of every crisis is different. And it only becomes an opportunity when whatever “new normal” emerges is better than current perceptions and fears. Crises can deepen—and outlive us.

With real estate you need liquidity for the panic to be reflected in prices. In Greece (I’ve just returned from a two-week expedition) there is a moratorium on foreclosures right now. So, we don’t have the fire sales that you might expect.

In Spain banks have foreclosed on, or control, hundreds of thousands of completed unsold condos and homes. This is the type of scenario that could throw off some very interesting opportunities.

As you know Europe is in crisis. But let me back up and take a look at Spain.

Home ownership in Spain (now over 80%) is encouraged through policy and a range of tax breaks. Municipalities were encouraged via windfall payments to designate land for development.

Cheap money flooded Spain even as its economy overheated in the 1990’s and up to about seven years ago. Remember, interest rates in euroland are set at the ECB in Frankfurt. Both Ireland and Spain were on a tear in the 1990’s when Germany was still recovering from reunification. Cheap money overwhelmed overheating economies. Spain suffered serious erosion of its competitiveness. Salaries were extremely low in Spain. They didn’t rise in line with real estate prices.

The price of a median home peaked at 13 times the median household income. (Please read that again…)

Meantime, seems like every Brit and Irishman couldn’t show his face in the pub if he didn’t have his own little piece of Spanish costa. Many buyers bought with little or no money down. Some were buying purely to flip.

Mid 2007 the music stopped. In the year to mid 2008, sales volumes fell by over 40% in places. The financial crisis of 2008 was the final nail in the coffin. Today half the young people are unemployed—if they haven’t emigrated. Spain has a very active (and growing) shadow economy.

Estimates put the total of Spain’s excess supply and distressed inventory as high as 2 million units. Much of this inventory (50% is a reasonable guess) is along the touristy costas.

Spain’s banks need a bailout. Spain’s regions need bailouts from the federal government. The federal government will take a bailout from the back door…and maybe soon the front door.

Banks have started to slash prices and offer up to 100% finance. They have slashed prices on junk that should have never been built. Don’t touch it.

But they have also slashed prices on new, quality condos in historic cities like Granada. With three UNESCO world heritage sites, Granada has intrinsic value. Tight permitting restrictions means that it hasn’t been over-built.

A new condo I visited was $92,000. It’s in a leafy residential area, a short stroll from the historic center. That’s a pretty good deal. Your hoa fees and property taxes will set you back a total of $50 per month.

The Costa del Sol is also seeing interesting movement. This is Europe’s sun belt. Tourists, retirees and second home owners come in their millions to escape northern Europe’s dreary winters and unreliable summers. I visited a high-end golf resort community. Condos look over green fairways and to the sea beyond. There’s miles of sandy beaches for walking. A charming marina area is 10 minutes away. You can buy (again, direct from the bank) a two-bedroom condo here with views to the ocean for $125,000. I don’t know anywhere comparable on my beat where you can buy a condo like this, in a community like this, for $125,000. Demand for short-term rental of this condo would be strong (perfect for golfers or a young family).

In these cases, you are buying for at least 40% less than what it would cost to build these condos. I’m excluding the land cost, sales and marketing, and other factors that appear with a project like this.

Where next for Spain, Europe and the euro? There’s a long and painful road ahead. I’m certainly not calling a bottom (only a fool would try to time a bottom in a crisis like this). But these prices are attracting buyers. Not like 2006…but good stuff at no-brainer pricing, with cheap finance, is starting to move.

My contacts tell me that later this year we will start to see fire sale auctions (like the ones in Ireland I have been telling members of Real Estate Trend Alert about.) Bring it on. I’ll be there.

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