With signs all pointing to a crash in the Spanish property market, the only question in Spain now is which bubble is bursting. Are only overvalued property companies in trouble, or is the country’s entire property market going down? For the economy as a whole, in which construction weighs in at a hefty 18%, it could mean the difference between a soft landing and a hard one, after 14 years of a construction-led boom that put Spain near the top of the euro zone’s growth league.
In the past week Astroc, a property company based in Valencia, saw its shares fall by 65% in what looked like a response to tighter planning regulations in the region. The worries have spread to other property groups, where shares have tumbled by more than a fifth since April 17th. Having been floated last May, Astroc’s shares had risen tenfold before the crash. Share prices of other leading property companies, such as Colonial, Metrovacesa, Fadesa, Urbis and Inmocaral, also soared last year. Worries spread wider into construction stocks such as Ferrovial, Acciona, ACS and Sacyr Vallehermoso, and banks such as Santander and BBVA, knocking the Ibex stockmarket index off by 1.7% in the week up to April 25th. On that day it was partially pepped up by reassuring noises from government officials and bankers.
Helped by low interest rates since it joined the euro in 1999, Spain has been erecting houses at an astonishing rate. Last year it built 800,000, reckoned to be more than France, Germany and Italy combined. Economists in Madrid forecast that the house-building boom will keep slowing until the new-build rate more closely matches the rate of new household formation, around half a million a year. House-price rises are already slowing, albeit not brutally. They peaked at about 18% a year in late 2003, and are now running around 7%, with some expecting them to slow further. Around the outskirts of Madrid there are new property developments where work appears to have stalled. The Bank of Spain has said in recent years that house prices were 35% overvalued.
Ever since the collapse in subprime lending in America there have been fears that the contagion would spread to those European economies, Spain and Ireland, which have been most heavily dependent on property and construction for their recent growth. But Spanish bankers like to point out that their lending conditions are more rigorous than America’s. Credit evaluations for mortgage applicants are often methodically carried out using tax returns.
Whatever happens to the Spanish housing market, which is roughly half of the total construction work in Spain, the effect on the big building contractors should be limited by their recent strategies. Firms such as Ferrovial and Acciona have been diversifying into other sectors and markets overseas. Acciona has moved heavily into energy, while Ferrovial has gone into services, buying for instance BAA, owner and operator of London’s airports. However, like Spanish homeowners, many of them are up to their necks in debt.