Real Estate Crisis Threatens Spanish Economy

Rising property values lured many Spaniards into the real estate market but the bubble has burst and the crisis is quickly spreading through the country's economy

by Reiner Wandler

"I'll give you a good price," the man, who introduces himself on the phone as José, promises potential buyers. José has a flat in Seseña, a small town of 12,000 around 40 minutes by car from Madrid. Now, he wants to get rid of it—regardless of the financial hit he might take. The real estate agent who sold him the property insisted it was a safe investment for the future. But those promises dissolved into thin air not long after José had signed the contract.

In total, 13,500 flats were supposed to be built in the new housing development where José's apartment is located—homes for 50,000 people. Yet, only halfway through the building project, the plug was pulled. Several unfinished apartment blocks now blight the landscape. In the end, only 5,000 apartments were completed and a mere 750 people moved in.

And those who did move here now want to leave—José's isn't the only balcony boasting a "For Sale" sign. He had hoped to be able to rent out the apartment to pay of his mortgage. But despite advertising his apartment for months in various publications, no one showed any interest.

Seseña, which until recently was the very symbol of the Spanish economic miracle, suddenly stands for something very different: the collapse of the building industry, one of the Spanish economy's key sectors. The golden years of the real estate business are now well and truly over.

Crisis Sparks Discount Battles

What is worse, however, is that the crisis has by now infected the entire country. Nowhere else in Europe in the last decade did the construction sector boom as it did in Spain: Real estate prices shot up by as much as 500 percent. The country invested in property, betting that prices would rise and rise. But, now the bubble has burst and the losers are those who did not sell in time.

Even the major players in the real estate sector have been hit. At a recent trade fair in Madrid, the biggest in Spain, a downright discount battle raged. "One year without payments," "€12,000 ($19,000) worth of furniture," or "a compact car" were just some of the offers. The response from buyers was only lukewarm.

Recently published figures also reflect the depth of the crisis: In the first quarter of 2008, 28 percent fewer homes were sold compared to the same period the previous year. The price of newly built real estate has fallen for the first time in 10 years. According to a study by Deutsche Bank, prices will drop by 20 percent by 2011.

The crisis in the construction industry—the motor of Spain's recent economic growth—has caused unemployment to rise more rapidly than since the early 1990s. The jobless rate now stands at over 9 percent with 424,555 Spaniards registering as unemployed in the past 12 months alone. Over a third of them had worked in construction.

With bankruptcies in the building sector rampant, it is a number that promises to rise even further. The Organization for Economic Cooperation and Development (OECD) predicts, by the end of the year, the jobless rate will creep up another percentage point.

A Dive in Confidence

Two other important sectors of the economy—tourism and the car industry—are also suffering. In June angry truck drivers blocked Spain's main roads, because they see their livelihoods threatened by high fuel prices. Only this Thursday, airline Spanair announced it would lay off thousands of workers. Meanwhile, the number of automobile registrations plunges to new lows each month.

Even those who have jobs are losing confidence. The already low average wage is being eroded by a 5 percent rate of inflation driven, just as elsewhere in Europe, by high fuel and food prices. Consumption is way down as a result.

Spaniards are also worrying about interest rate rises: A peculiarity in the Spanish mortgage market means rate rises hit home faster than in other countries. Unlike in Germany, for example, mortgage rates are not fixed for several years, but are constantly changed in line with the prime rate. As a result, even well-paid Spaniards are pushed right to the limits of what they can afford.