11.th November Spain and Beyond

 Last week I wrote about the healthy housing market and how the health of the housing market, has a fundamental part to play with the wider economy.

 This week, and next, we will draw comparisons with 2 overseas housing markets, Spain and Argentina as together and individually they have much to tell us about our own market and how recent banking developments within the UK may affect the future of the UK market.

 Additionally, we will look at recent G.D.P. figures, which apparently caught all economic forecasters off guard.

 Unanimously all these so called economists expected G.D.P. (Gross Domestic Product) or growth in the UK economy for 3 months ending September 09 to be positive; thereby confirming the economy was coming out of recession.

 Instead the figures were –0/4%, which meant the UK, was now officially in “depression”, or in the last 6 quarters, the economy has contracted by 5.9%.

 This officially confirms what the National Institute for Economic and Social Research (NICS) has been saying we are in depression mode.

 Fred Harrison taught me in his book “Boom Bust: House Prices and the Depression of 2010”, that the Depression of 2010 was historically inevitable.

 The current figures only tell us, the current economics malaise is as bad as we have ever experienced… that includes the 1920s, 1930s and the very worst of the 1970s.

 However, does it feel bad to you?

 

Personally, Yes.

 I have been a banker, but also been self-employed just as long… and it has never been worse.

 

Added to the falls in economic output, throughout the EU in deflation. In Ireland prices are falling from –3%-6%, dependent on which figures you believe. Prices in Japan are falling over 6% annually.

 Prices, just in September fell 3% in Ireland, 1.8% in Portugal, 1% Spain, this is just in one month remember!

 These countries were turbo charged with growth when ECB rate settlers based in Frankfurt, kept interest rates too low, or too loose for too long. Now monetary policy is too tight in the mistaken belief that inflation will ignite these economies again.

 The German economy is expected to decline 6% this year and worse Angela Merkel has paid subsidies to big German companies, in order to allow them to pay full-time wages to staff on a part-time hours. Those subsidies are now going to end and, as is likely exports, are not going to pick up as expected in 2010, leading to further mass lay offs in the engine room of Europe.

 Also, because of constraints being put on banks, as a result of G20 proposals, banks have to hold more cash on deposit, this restricting the amount of money they can lend.

 

So despite lowest interest rates on record, deflation and QE at record levels, what does the future hold for us? Darkness.

 Quite simply, consumer spending is going to decline, job losses are going to increase, deflation will get worse and people will try and save more, as they fear for their future.

 Every government in the developed world has to boost QE for several years and if they don’t, the slump back will be deeper, bigger and more rapid than anything ever seen.

 The worldwide slump in output has been faster and deeper than at any time seen in economic history and at the moment the prospects for preventing the slide, appear limited.

 

The lost decade of the 1990s in Japan show us what life could be like for us.

 Germany is going to the same way.

 Spanish banks arrogantly believe they have been protected by the actions of the Bank of Spain, who because of the property bubble of the 1980s forced all Spanish banks to hold more capital and lend less aggressively.

 The problem is in the last 9 years; ECB interest rates were too low and Spanish lenders, naively relied on professional valuations by RICS (Royal Institute of Chartered Surveyors) equivalent surveyors, to tell them, what a Spanish property was worth.

 The largest and most professional valuation business was TINSA.

 Their reports were thorough, professional, comprehensive and contained excellent comparisons for neighboroughling properties, to allow lenders to see how prices for the property under survey, compared to similar properties in the locality.

 Unfortunately from my personal experience, the experience of sales agents and bank employees themselves in the branches, TINSA valuations were obligatory.

 TINSA as well, undertook valuations in various economic categories, i.e. buoyant, constant, declining and recession. All valuations contained one of the above phrases to describe the current economic outlook or something similar.

 

Those buying off plan had a limit on their borrowing by lenders which was typically 70% of purchase price or a lower percentage of the open market value or valuation provided by TINSA.

 

By way of an example, late last year I tried to arrange finance in a property that I paid a 109,000 Euros deposit on. The purchase price agreed in May 2007 was 465,000 Euros, so my deposit was 23%. When the property was eventually valued in January 09 by TINSA under recession code it was valued @ 1080 Million Euros.

 

Now to say even I knew that was stupid was an understatement, but I had to pay 1000 Euros for this report.

 

Ultimately I got finance but was not prepared to accept it, as the terms of the mortgage were payments of 3,000 Euros per month and 6.75% interest rate.

 

That property in now on the market @ 650,000 Euros and still is unsold.

 

Virtually every bank in Spain uses TINSA valuations for both residential and commercial property valuations and all Spanish lenders have to re-assess their property values annually.

 

Currently market valuations in Mallorca are down 30%. Any Mallorcan property under 1 million Euros bought in the period 2003 onwards, probably is worth less today… and it’s in the period of 2003-2008 that most Spanish banks really exploded their lending.

 

85% of Spaniards are owner-occupiers, and the number of overseas buyers is substantial. Construction accounted about 20-25% of GDP in some Spanish regions and every bank lent to developers as though there was no tomorrow.

 Commercial property valuations, due to poor levels of tenant occupancy in Madrid, Barcelona, Valencia, Seville etc, etc have fallen so dramatically that many tenants are only paying 30% of the rent they used to pay, as landlords desperate to hang on, use any measure to get income in.

 

Spanish Banks are up to their neck in Commercial property and they gorged on it.

 Revaluations for all these properties are now arriving on Spanish Banks desks, and they make grim reading. So Spanish Banks are only now about to get into a very, very hot bath and feel and understand what sub-prime really feels like.

 Rising unemployment, deflation, massive falls in GDP and massively reduced inward investment in Spain by overseas buyers is going to make Spain a basket case.

Allied with the collapse in sterling for UK visitors, the situation is desperate.

 The ECB in Frankfurt appear happy with their one size fits all approach and hence the PIGS, Portugal, Spain, Ireland and Greece are going to be slaughtered to protect German and French industry… which clings on the belief things will get better.

 

Things will get much, much worse throughout the EU before they get better.

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