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The booms in Spanish and Irish real estate make the US real estate boom look timid

by Brad Setser
November 21, 2006

I have outsourced Thanksgiving blogging to Charles Gottlieb of the Center for European policy studies in Brussels.   (Charles.gottlieb at ceps.be)

His topic: The Spanish and Irish housing booms (or bubbles).   The Spanish and Irish economies are even more housing-centric than the US economy … and potentially are even more exposed to a housing slump.  

Enjoy! 

 Red alert in the Euro zone-periphery – some are still riding the housing bubble

 As argued all along the housing euphoric “literature”, global factors have greatly fuelled housing prices in Europe.  The historical lowness of interest rates has played a great role, but also the development of financial systems that allow people to borrow against their future income and the home’s value.

Yet even amid a global housing boom, Spain and Ireland stand out. France –which has experienced very strong home price appreciation recently seems bound to cool (see my previous contribution).  But Ireland and Spain are still rocketing, with home price growth of around 10% yoy (INE and CSO) over 2006 … (UK too, though after a pause).  These two EU periphery countries exhibit the biggest housing price hikes, highest residential investment (relative to GDP) and most jobs in construction sector.  They are consequently among the most housing-centric economies in the entire world ….

Spain and Ireland have benefited from strong convergence-related growth and positive population dynamics.  But it now seems clear that those fundamentals don’t suffice to justify their housing prices dynamics.   Economic agents are increasingly exposed to interest rate hikes, and the economy as a whole is increasingly tied to their construction sector. Hence Spain and Ireland have ridden the housing boom more than most, with better than average economic performance… but now a red alert looms.

What explains the biggest housing booms in the OECD? Ireland and Spain’s over-muscled fundamental 

Spain and Ireland both greatly benefited from low interest rates, from favourable migration dynamics, and their housing sector has both benefited from (and contributed to) strong local economic growth. By importing the credibility of the European Central Bank, they benefit from low nominal interest rates, in spite of their vivid growth and consequent higher than average inflation. Thus in addition to the global savings glut which exercised downward pressure on nominal interest rates, both countries exhibit very low real interest rates.

Up until European monetary integration, both countries used to be European outliers. Both countries had not benefited from the European post-war wealth surge, and had living standard well below the European average. However, membership in the European Union and EMU triggered a strong “catch-up process”.  On its current path, Spain will have fully converged with the Euro zone’s big three (France, Germany and Italy) in only 7 more years. 

Such development have unleashed “animal spirits,” made both countries attractive destinations for immigrants (a big historic change), and laid down a strong basis for their real disposable income growth. Simultaneously, the perception of increased economic certainty, changes in financial markets and financial innovation in Spain and Ireland have made mortgage credit more available. The deepening of mortgage markets has helped to sustain the unprecedented persistence of demand for housing amid surging home prices. In fact, the total value of mortgage debt in Ireland tripled over the 2000-2005 horizon, and mortgage lending is still growing at a 20% pace.  Spanish lending is still growing at a 23.6% pace. Given that in Ireland 83% of total outstanding mortgage debt in 2005 and in Spain, 97% of the debt is at variable rate interest, households are considerably exposed to interest rate hikes.

The sensitivity of both countries’ market to interest rate change is thus considerable, and could rapidly trickle down to households’ balance sheets as monthly repayments are bound to rise (considering the current lowness of interest rates in the Euro area). Also a sharp increase in interest rates may trigger reduction in housing demand, raise the repayment service of indebted households and could backfire onto the financial system. Already in Spain, the average person with a mortgage allocates fifty five percent of their wage on their principal or secondary home repayments a share which increased by 4.1% since 2003 (La Caixa, 2005).

Both Spain and Ireland are more American than the US: they have comparable population dynamics (thanks to migration) and faster growth in both real disposable income and real housing prices.   

Chart 1: Growth over the 1999-2005 period  

spain_ireland_1 

Source: OECD database, Eurostat.

However, Spain looks a bit frothier than Ireland.   Spain has lower real income growth than Ireland but faster home price appreciation.  Spanish nominal wage increases have remained above the euro area average despite low productivity gains.  Amid strong demand pressures and weak competition, companies have been able to pass on relatively rapid labour cost increases into prices.   And strong wage growth, in turn, has helped to support the surge of housing prices (this works both ways: given the labour intensive character of the housing industry, higher wages have pushed up new home prices). Home construction costs have risen by 25% for Ireland and 33% for Spain between 2000 and 2005, contributing to the 64% and 84% respective increases in home prices over the 2000-2005 period. 

The surge in prices in both countries does not reflect limits on supply:  unlike in the UK and France, investment in the residential sector in Spain and Ireland has boomed.   In Ireland investment in housing represents 14% of GDP, and Spain 9%, while most other Eurozone countries exhibit a share of 5% of GDP (Eurostat 2005 data).  (Residential investment in the US peaked at 6.2%).

Consequently, both countries are increasingly exposed to a slump in investment even if it doesn’t spill over to slump in consumption.  Spain and Ireland also are at the top of the European scale when it comes to employment in construction, with home construction accounting for approx. 12% of employment in 2005. Construction output per capita in Ireland is highest relative to Euro zone countries at approximately €7,600 and house completion was four times the average of other European countries in 2005 (CSO report), twice  the corresponding figure for the UK.  

 

The National Bank of Ireland recognizes that a sharp reduction in housing output would lower employment, investment and growth.   But the exposure of the Irish economy to a slowdown of the housing sector seems even large than the monetary authorities admits. Too lenient tax incentives have caused housing price overvaluation and lured too many resources towards residential investment. This has lead to an inefficient allocation of resources, which could particularly hamper Irish and Spanish growth going forward.

A reversion to mean in the housing sector would imply a big fall in all economic measures, and might introduce a temporary recession in Europe’s periphery. As emphasized in my first post, the wealth effect from a slump in housing prices is considerable in Spain and Ireland. However even if these indirect effects reveal to be more contained, direct effects through investment and employment in the housing sector will curb growth and necessitate considerable reallocation of resources away from housing.  

Sociology  intertwined with Economics

The housing markets in both Ireland and Spain have been supported by a recent influx of migrants’. Approximately 54 per cent of new immigrants belong to the 25-44 age categories, the age category most likely to invest in housing.

But migration matters less that domestic social factors – and national policy choices.  Spain and Ireland have — with Italy — the highest home ownership rates in Europe (Spain 85%, Ireland 77% and Italy 80% as of 2002) as a result of long term national policies favouring of house owners.   In Ireland, tax treatment of housing is very favourable for home ownership compared to other EU countries (van den Noord, 2005). In Spain, any housing property is tax-deductible and for every sort of income source, whereas ordinary rental properties are not.  Such asymmetrical treatment of rental compared to property has lead to high ownership rates (see BIS paper). 

Such regulatory measures impeded the emergence of a rental market. Indeed, Spain (and Italy)’s population relies on a traditional family structure to compensate for lack of rental opportunities, infrastructure, and low public transfers for the young. Young Spaniards and Italians face the so-called Delay Syndrome; 63% of 20-34 year old unmarried co-habited with their parents in Italy. In Spain, the equivalent figure is 40% as of 2004 (compared with 20% in Germany).  The average size of Spanish households, while falling, is the highest in Europe (INE stats).  A more differentiated housing market which allows for all age categories to choose between living at home, renting and owning would be better than the status quo.

On the one hand, the lack of rental market in those countries inhibits the Spanish youth to gain independency from their parents. On the other, the house owners refraining from renting their housing property are this generation’s parents…

To develop Spain and Ireland’s rental markets fiscal incentives favoring owners have to be abolished or at least rebalanced to the benefit of tenants. In Spain an institutional setup has to be implemented that secures alternatives for renting out owned housing, so that owner’s don’t need to occupy it. Such measures would reduce the amount of vacant properties which in Spain amounts to three million properties, and ease housing prices.

Red alert in the periphery

Central banks are concerned that recent pursuance of housing price growth in both countries wasn’t supported by fundamentals. The Irish national Bank stated in its latest financial stability report that the 2006 price surge wasn’t expected. In Spain, the Central bank has already issued some warnings regarding credit risk monitoring. The IMF Directors noted “that an abrupt correction cannot be ruled out” in Ireland.  

Cotis from the OECD has acknowledged that several big countries are at risk of a housing downturn: with the USA, France and the UK topping the list.  But, given the extreme dependence of both Spain and Ireland on housing, both countries are even more exposed to a sharp correction.

And there is one key difference between the small – and no longer so small countries like Spain — countries on the periphery and the bigger economies: just as the ECB hasn’t raised rates to offset the boom in home prices in Europe’s periphery, it is unlikely to lower rates just to help smaller economies.  Wine and roses don’t last forever.  Monetary union has offered huge advantages to both Ireland and Spain, but it won’t always generate the favourable dynamics both countries have enjoyed recently.

22 Comments

  • Posted by Eddy

    The “usual suspect” of easy external financing is also present in the case of Spain.

    Spanish banks and Cajas (S&L) have used the European interbank market and have sold massive amounts of MBS to european investors to finance this orgy.

    C.A deficit hit 100 billion $ in August (y/y).or 80 billion Euro. Foreign debt is exploding. Non financial firms have learned how to use cheap debt to launch monster LBOs abroad (ring ring Iceland).

    There is a rush to build similar to a “Great Step Forward” fever. New cities are surging in the midst of nowhere:
    [URL]http://www.youtube.com/watch?v=wPluEulupHM[/URL]

  • Posted by Eddy
  • Posted by irelandspain

    Two rathole economies built on ponzi schemes. They actually believe real estate only goes up in those countries more than Americans.

    Forget aid, why can’t they have a real estate boom in East Africa?

  • Posted by Guest

    Global Credit Bubble Boom from excess US Dollar liquidity
    http://www.prudentbear.com/creditbubblebulletin.asp

    Today, the unfolding Derivatives “Insurance” Bubble is creating one additional troubling facet to what has developed into a full-fledged global Credit Bubble comprising U.S. household, government, financial sector and corporate finance, along with Credit systems and asset markets around the world. Global imbalances and associated liquidity excess are unprecedented and the dollar vulnerable. Despite the recent energy price decline, the domestic and global backdrop remains inflationary as opposed to dis-inflationary. Here at home, productivity is waning and wage pressures are rising.

    Surely, the Fed today lacks the flexibility it enjoyed in 2001. Housing Bubble vulnerability is keeping it from actually tightening financial conditions, leaving “terminal phase” Credit excesses to run unchecked. At the same time, one would assume that speculative excess will hold easing impulses at bay. I am left with the uncomfortable feeling that – with U.S. mortgage, govt., corporate, financial sector and global Credit Bubbles now largely synchronized.

    I know of no other period marked by such pervasive market pricing distortions. As I’ve argued all along, unlimited Credit/”finance” and unchecked leveraged speculation are The Bane of Free Market Capitalism. Yet it’s amazing how recent Monetary Disorder (inflating stock markets) has the “free market” bullish crowd filling the airwaves with flawed analysis and wishful thinking.

    - Doug Noland
    November 17, 2006

  • Posted by Guest

    US GOVERNMENT INFLATION BS !!!

    In the US, according to government figures, we have inflation running around around 2%. The true number is around 7%. That’s NOT taking into account the increase in home values. It seems the government inserts a nice little caveat when it comes to numbers. Where inflation is concerned, they state “Inflation numbers do not factor in in food, energy and housing.” In other words, they take out the biggest cause of inflation and if you don’t eat, don’t drive a car, don’t use electricity or gas and live in the desert in a cardboard box……..then they are correct. Inflation is running at 2%.
    AND, the computer-power correction factor. They calculate the price for PC’s based on performance. So the price of a PC drops about 60% each year. PC’s are one of the components in the inflation calculation. Another beauty is the substitution clause. If sirloin becomes to expensive, then they use the price of hamburger patties instead. Very soon the government will substitute dog food.

  • Posted by Cassandra

    Asset prices, whatever their nature, cannot be tamed if and when authorities tighten, the market knows they will simply loosen (or worse dump money from helicopters) at the first sign of weakness or Schumpeterian adjustment. Such rapid easing might be just the required elixir, but, maybe it won’t be or shouldn’t be (e.g. ZIRP & its spillover-effects), and so such knee-jerk policy response to safety-net speculators is simply absurd from a policy point of view should authorities be desirious of price-stability across all manner of goods, services and asset prices.

    There is much the authorities can do proactively and specfically for property markets, whether limiting the scope and nature of finance, making greater use of the tax system, raising banking reserve requirements, increasing transaction turnover taxes or wealth-taxes, as well as assessing higher levies on properties owned by non-residents. Yet, almost all regulatory efforts are moving in the opposite direction, contributing to the gallop in prices.

    Having said all that, one must objectively entertain the possibly whimsical notion, irrespective of historical experience, whether the “risk premium” on property has not, historically speaking, been to high, or the leverage applied, too low for the term of the investment, and hardness and marketability of the asset. Histotrical experience has been gravely affected by rapidly changing geopolitics, rapid economic development, more or less continuous catastrophic conflict war, demographics, and the periodic pandemic, holocaust, or genocide, such that modernity-now-experienced (stability, democtaization of property ownership, savings & investment etc.) now represents – ceteris paribus – a dramatic departure from anything heretofore seen or experienced by us or our ancestors. As such, it is worth, honestly and objectively, entertaining the notion that “real estate” cap rates should be more highly-valued than fixed income promises, since there is an embedded in-the-money call-option on inflation. Sure, there is downside risk (pandemic, war, depression), but even Sovereign paper has risk (witness GKOs, Turkey, Agrentina, etc.). Yes, just perhaps the rollicking real estate values are NOT a reflection of mis-placed expectations for real-estate, but a statement about sovereign risk, the preference of the real vs. the promise under a global regime where “moral hazard” is both encouraged and cultivated, not to mention idolized in the form of the LBO, Private Equity, or Hedge Fund Hero.

    Of course as Mr Gottlieb suggests, it may all be folly built upon shaky underpinnings, but little outside of natural catastrophe is liklely to upset the course of its nominal march, save more sober fiscal and sounder money policies through-out, with their attendant cascades.
    http://nihoncassandra.blogspot.com/

  • Posted by Guest

    Labor Challenges “Rubinomics” as US Democrats Recapture Power
    By Kim Chipman
    Bloomberg
    Wednesday 22 November 2006

    “We need to review the Rubin agenda that’s led to millions of lost jobs and declining standard of living for the middle class,” said United Steelworkers President Leo Girard. “It’s an agenda that has been very good for Citigroup and the financial community because they’ve been able to finance the relocation of jobs and refinance the trade deficits.”

    “When the wizards of Wall Street start dictating Democratic policy, the first to be forgotten are the Democratic voters who made these election successes possible,” said Rick Sloan, a spokesman for the International Association of Machinists and Aerospace Workers. “We get screwed every time these guys grab the handles of power. They forget the need to create jobs. They are much more interested in Chinese growth than Cleveland’s growth.”

    “If you are sending more people to college, but there are no jobs, or just jobs earning $10,000 a year or less in real dollar terms compared to 10 years ago, then that doesn’t fix the system,” the Steelworkers’ Girard said.

  • Posted by gillies

    some factors in the irish property boom -

    1. irish people have a folk memory of eviction, thus an inbuilt fear of being a tenant, and an exaggerated respect for freehold ownership.

    2. the irish property developers and construction industry occupy a place in irish politics that parallels the military-industrial complex in the u s.

    3. the interest rates, as observed above, are set for european, not local irish requirements.

    4. most irish first time buyers aged 35 or under have no personal or anecdotal memory of property prices going down.

    5. immigrants sustain the rental market, which in turn sustains the buy-to-let investment market. a proportion of houses are second houses, or third.

    6. governments pretend that subsidies to first time buyers help first time buyers – where in fact they pour petrol on the firestorm of property prices.

    7. i am 63. i have house hunted in dublin for houses at £5000 = €6300 – which now sell for €2500000 (count the zeros.) i think that means the price is now 400 times what it was 40 years ago ? now try telling a dublin buyer that property is a risky investment . . . . that period of course includes irish accession to the european common market.

    8. the irish economy is the most open (= least self contained) perhaps in the world.

    9. some irish wealth is offshore – you guessed it – invested in the spanish property boom !

    god help us all.

  • Posted by Greg Byshenk

    I’m not an economist, so I may be mistaken, but it strikes me that this discussion misses at least one important point, which is related to the EU. That is, one shouldn’t look only at the relative prices over time within Spain or Ireland, but also at the prices relative to the rest of the EU.

    Yes, prices of homes — and most other things, and wages — have increased in Spain and Ireland. But that was one of the goals of EU integration. And, if I am not mistaken (I don’t have any figures to hand, and I welcome correction if I am wrong in this), despite the increases, housing prices — at least in Spain — are still below the EU average.

    None of which proves that the prices are not inflated, of course, but such does suggest that time-relative price increases are not in themselves proof of a bubble.

  • Posted by koteli

    Spanish economy is based on tourism and brick. We call it —lately— “brick economy.”

    Eddy’s post (the first) is totally right. He is talking about finances, mostly, but he also talks about cities in the midst of nowhere: Seseña is just an example, in youtube.

    I think that Gottlieb analysis is very good, but I’d liked to comment some micro-economy matters he lost in macro:

    —Spanish minimum wage is 540€ (not 1240€ like in France) This little detail that direct relation with young people being at home until it’s to late (i got surprised with the italian %).

    — Young people in Spain are more educated that in any time in history. As public university works quite well, we have lots of engineers and doctors, etc. (60% women and 40% men, an interesting difference).

    — Educated and graduated people goes to the marked searching for a job, and most of them are working with wages of around 1000€ (1250&, per month).

    — The educated young people have became a new class. We call them “mileuristas”, which means “people working for 1250&/month”. This new class, is used as a substitute to old people who are getting retired from the staff of enterprises in crisis and so on, in the same way that in-migrant south americans are the ordinary workers of “phone companies”. It’s is difficult to have a client attention call on your phone without south american accent.

    — Spanish household expends a 42% of their earnings in their mortgage (remember the wages before), working both of the marriege and any son.

    — Spanish president said yesterday that Spain will pass Italy in economy before 2010.

    — Who’s economy? I think that the middle class in Spain is going down and down, more that US.

    — It’s funny to see, in little towns, that plumbers and some other housing workers are rich, with SUVs and full of wealth, while public teachers and most of the people is receiving wages that are 50% below the wages they had 10 years ago, inflation-adjusted.

    — This goes to gillies (I asked him a little explanation in Nouriel’s blog, but he changed the blog with no answer). I bought my beautiful apartment in San Sebastian (South of Basque Country —maybe more well-known for ETA, like Ireland was famous by IRA—, in the frontier with France. A tiny beautifully city of 200.000 people). I bought it for 100.000€, twelve years ago. Now it could be sold for 350.000 in one week. Do you thing this makes me more rich?

    — We are trying to get some peace, politically speaking (peace for everybody). We don’t expect large amounts of money from USA, as you he received, mostly because our people in the diaspora are south-americans with no money or leverage in Spanish economy.

    — I don’t think that Ireland people could be too worried about economy. Apart of the surge in prices, you are earning quite well. It’s funny that if you want to buy an Apple computer with a phone call, you are always answered from Ireland.

    I’m loosing the north of the subject of the blog… I give it up.

    Good thanksgiving day to everybody.

  • Posted by FTX

    Big move in the dollar today. Euro has broken though $1.30 barrier (always happens when Brad’s not around – he’s the only thing between the USD and capitulation :)

    Must be a tempting arbitrage for European property owners developing as US real estate and dollar fall simultaneously. Window of opportunity could be short though, and it’s likely to be a long-term hold.

  • Posted by Michele

    Very bright analysis, but I think you forgot Italy. Most of the factors you mentioned I beleive are also valid for Italy, where house prices continues to “sky-rocket” out of nay logic. Here in Rome is normal to find a 100 sqm. apartment in a good place at more than 1million €… Nonsense compared with the median wages…
    Bye.
    Michele

  • Posted by Charles

    greg – Unfortunately, Housing prices at the EU level are very hard to compare. The ECB has just started a survey to get better Housing price data across the EU, to enable cross country comparison. From the data I have, Spain’s square meter price are still below France’s for example, however if you adjust for local costs, I believe that Spain’s are relatively more expensive.
    I don’t mention the word “bubble” in my comment. I am not convinced yet of a bubble, however I doubt the sustainability of the price surge as fundamentals seem shaky. Especially in the case of spain and ireland, the overexposure of the economy to housing and building exhibits inefficiencies at the micro level. It is simply not optimal for an economy of Spain and Ireland’s caliber to allocate 10% and 15% respectively of their investment into construction. So this elements potentially hint towards a bubble, but are indeed no reliable proof.
    As Wolf puts it nicely in today’s FT: “if people’s expectations of future price increases are affected by their recent experience prices will tend to overshoot fundamentals: this is just how bubbles form.”
    http://www.ft.com/cms/s/10757892-7b21-11db-bf9b-0000779e2340.html

    Koteli- Your figure on mortgage repayments seems outrageous to me. ECB says that the mortgage debt service to income ratio is barely at 5% for 2005… and it’s growth is quite sluggish. In fact principal repayments have grown, but been compensated by slowing interest rate payments (due to lowness of interest rates).

    Michele- Italy is in fact also an interesting case study. However, they definitely fall out of any convergence perspective… given their growth track record. I believe Italy is a mixture of france and spain. France due to the regulation and Spain due to the societal factors.

  • Posted by koteli

    Hi Charles, thank you for your work, and please, go on.

    To spend the 42% of the family wages to refy the mortgage is outrageous, indeed. But, it’s not my invention. I read it in El País, quotting Spanish Bank last data. Just google-ing: 42% + hipoteca, I had several links to that info. Here go Cinco Días economic newspaper info, and several other links, for you to check the info. As I know you speak spanish, here go:

    El 42% de la renta se destina a la hipoteca de la vivienda

    El esfuerzo que tienen que hacer las familias para comprar un piso es cada vez mayor. Los hogares destinan ya el 42,1% de su renta bruta al pago de la hipoteca. Pero si se contabilizan las deducciones fiscales por la compra de vivienda el esfuerzo de los hogares se limita al 29,5%.
    Los datos financieros, publicados por el Banco de España, contrastan también con los del tercer trimestre de 2005, dónde el esfuerzo para comprar un piso tan sólo representaba el 36% de la renta bruta de una familia. En el aumento de este esfuerzo ha tenido mucho que ver el alza del precio de la vivienda que, aunque está empezando a desacelerarse sigue creciendo a un ritmo cercano al 10%.
    Tras los nueve primeros meses del año, el precio de una vivienda libre con una superficie de 94 metros cuadrados es 7,1 veces superior a la renta bruta anual de un hogar medio, lo que supone el mayor nivel desde que el Banco de España dispone de estadísticas precisas para obtener esta relación. El encarecimiento de la vivienda obliga a las familias españolas a contratar créditos hipotecarios cada vez mayores para comprarse una casa.
    Este crecimiento se hace evidente en del crédito hipotecario, que refleja el dinero que piden los ciudadanos a entidades de crédito para hacer frente a sus hipotecas.
    En cuatro años, este indicador ha crecido a tasas superiores al 20%. En volumen total el crédito hipotecario de los hogares ha pasado de 308.597 a 538.974 millones de euros (datos a agosto), récord histórico, informa Efe.
    El mayor esfuerzo de las familias para la compra de un piso está siendo agravado por la política monetaria del BCE, que se ha endurecido progresivamente. Así desde diciembre de 2005, la institución ha decidido cinco subidas de tipos de interés, que han hecho pasar el precio del dinero del 2% al 3,25%. Esas subidas se han dejado sentir en el euribor, la principal referencia para préstamos hipotecarios, que ha alcanzado su nivel más alto desde julio de 2002, al llegar al 3,79%.
    No obstante, las ayudas fiscales por compra de vivienda mitigan en parte la situación familiar. El esfuerzo por la compra de un piso se reduce al 29,5% de la renta anual si se contabiliza la bonificación de Hacienda.
    La inversión inmobiliaria en el extranjero crece un 87,3%

    Los españoles invirtieron en el primer semestre 1.225 millones de euros en comprar viviendas en el extranjero, un 87,3% más que en igual periodo de 2005, cuando el montante de la inversión ascendió a 654 millones, según datos del Banco de España.La carestía de la vivienda en España anima cada vez más a los inversores a buscar oportunidades en el extranjero, sobre todo en la Europa del Este. Sólo en el mes de julio, los españoles gastaron 241 millones, en comprar viviendas en el exterior un 85,38% más que en el mismo mes de 2005.

    http://www.cincodias.com/articulo/economia/42/renta/destina/hipoteca/vivienda/cdscdi/20061102cdscdieco_7/Tes/

    http://www.lasemana.es/periodico/noticia.php?cod=15960

    http://www.infohipoteca.net/

    http://www.consumer.es/web/es/vivienda/2006/11/02/156939.php

    PS. I think the bubble is making people crazy.

  • Posted by koteli

    A little update from today El Pais, the first in the Economy section right now:

    La compra de una vivienda nos cuesta ya nueve años de sueldo
    (Buying a house takes us the full wages of 9 years)

    If you remove the upper classes or rich people, this means 20 years.

    http://www.elpais.com/articulo/economia/compra/vivienda/nos/cuesta/anos/sueldo/elpepueco/20061124elpepueco_3/Tes

  • Posted by Skoobz

    Blad, and Charles: Please write more about the international housing bubble! Great stuff.

  • Posted by Guest

    “En el informe se incluye una encuesta que revela, entre otros datos, que el 37,2% de los españoles sabe, ya sea por actuación propia o la de algún familiar o conocido, de alguien que ha hecho compra-venta de vivienda con el único fin de hacer negocio.” (quote from El pais).
    This is the indicator for the existence of a bubble: people are buying houses with the sole intention of reselling them at a higher price.

  • Posted by Anonymous

    Cassandra – persuasive arguments, and ones which we should bear in mind.

  • Posted by Emmanuel

    Charles Gottlieb/Brad Sester–the charts don’t seem to be displaying correctly with this post and in “Enough on China…” Please fix these soon as I am of course interested in seeing the charts.

  • Posted by bsetser

    Emmanuel – I will redo the graphs on sunday (I have to be in the office to upload). not sure what happened.

  • Posted by Guest

    Moved to Dublin from US in 2005. House prices looked sky-high considering crap building quality, no facilities, lack of infrastructure. The prices went up another 20% then. However, the housing market slowed down in the last ~4-5 months. Upper end of the market is already showing price deflation (I am talking about Million plus euro houses). Some people think it is the interest rates, some think rumors of stamp duty reduction. I think perfect storm brewing for Irish housing market despite what spin doctors says. Here are my thoughts:
    1- Ireland builds 80K to 90K houses per year. This is a big number considering this is only a ~ 4 million nation. There is an over supply of the houses (or flats) already. According to Sunday Business Times, 20% of the houses/flats in Ireland is unoccupied; bought for capital appreciation. What will happen when house price inflation stop? Too many houses on the market chasing few buyers=House price depreciation!!
    2- Democratic factors: There is big flux of Eastern Europeans to Ireland. However these people are doing low-end job jobs, earning minimum wages (~8 Euro/per hour). I don’t understand how these people could effort buying a house in Dublin. Or could be factor of pushing house prices higher.
    3- Increasing ECB interest rates is putting Individuals and Banks under ever increasing stress. Ireland has the highest debt ratio per person in Europe. (In Dublin average house price is over 400K euro and Average industrial wage is ~35K/year) Irish Banks keep finding new ways of lending more money. A recent study published in Irish newspapers put Irish banks in the same group of Zimbabwe, and Azerbaijan banks (not very healthy).
    4- ~15% Irish GDP is generated by export to US; highest in the Europe. Slowing down US economy is not good news for Irish Economy neither. Any slow-down in the economy will result in less investment in the already over priced Housing market, and it will affect individuals capacity to service their dept payments.

  • Posted by Laurent GUERBY

    I really want to know who is holding all those euro and USA MBS …