It didn’t take much. Last week, audited accounts from Valencian real estate developer Astroc were out, and it was the small print that raised alarm. Apparently, some of last year’s profits came from the sale of Astroc assets to its chairman. This immediately led to fears that the company had been deliberately trying to distort figures, artificially keeping the share price up. On that news, shares in the company fell dramatically. But, it didn’t stop there. The shares in other Spanish real estate companies fell too, and suddenly, headlines proclaimed that the Spanish property market was about to crash.
Fears about the vulnerability of the Spanish economy have been doing the rounds for some time. In May last year, for example, we wrote about the enormous level of debt that has built up in the country. Also last year, we warned about the country’s balance of payments deficit. As a percent of GDP, in 2006 this was higher than in the US.
Then there’s the property market. House prices have doubled since 2000. Every year, 620,000 new properties are being built, which is four times the level seen in the UK. This, in turn, has encouraged Spanish consumers to put it on the plastic, and household debt is now running at over 120 per cent of income.
Many blame the euro. The problem is this: the rate of interest has to be at a level that is appropriate right across the eurozone. In practice, this has meant rates that were too high to kick start the Germany economy, and far too low for Spain, which was in danger of overheating as it was.
So, with all these doubts lurking, a whiff of a scandal, and suddenly, there’s a queue of analysts wanting to predict doom for Spain.
But not everyone agrees it’s curtains for the Spanish market.
For one thing, house prices are already falling. Last week also saw the revelation of the latest property price data in Spain. Some took fright when they saw the figures: the annual rise in house prices slowed from 9.1 to 7.2 per cent in the first quarter of this year, that’s the lowest level of inflation in the market since 1999. Others, however, saw hope, saying the market is slowing, not crashing; that Spain is enjoying the much sought after soft landing.
In fact, the property market has seen prices increase by an ever falling level for three years now - again, a sign of a soft landing.
The sub-prime market in Spain, while growing, is a minnow compared to the market in the US. Again, a sign the market can withstand shocks.
Capital Economics concluded this: “However, fears of a ‘hard landing’ are probably overdone. In all, then, we expect Spanish GDP growth to slow to around 3.2 per cent this year. This entails a marked slowing in the average quarterly GDP growth rate to 0.7 per cent from last year’s 1.0 percent. But Spanish growth is still likely to be comfortably above the euro-zone average this year. As such, we still expect Spain to make a healthy contribution to euro-zone GDP growth in 2007.”
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