The most-read article on the BBC website on Wednesday was “Boy’s older women love triangle”. The second was more interesting: “Spain hit by property crash fears.” On Tuesday, disappointing house-price growth numbers for the first quarter (the lowest for eight years) had made their way around, as had the news that while there were 800,000 new housing starts approved for 2007, demand for them was estimated to be more like 600,000. Traders put this together with concerns about bad corporate governance at Valencian real-estate developer Astroc and the next thing we knew a wave of panic selling had hit the market. The Spanish index ended the day down 2.5%, Astroc itself is now down 60% from its peak and the other big real-estate names are all down in the region of 20% plus.
The odd thing about this is not that it has happened, but that it has taken so long to happen. The five top real-estate sector stocks rose over 130% last year alone and Astroc itself was at one stage up 1,000% on its listing price from May last year. Yet the fundamentals of the Spanish property market are appalling. Like the rest of the world’s bubbles, Spain’s has been driven by overly low interest rates and very loose lending policies. This was fine as long as rates stayed low. But they’ve now risen seven times since 2005 and will probably rise further, which has got to be hurting the subprime market at least: note that over 90% of Spanish mortgages are floating rate.
Worse, after years of rampant building (Spain has three-quarters the population of the UK, yet put up four times as many houses last year) there is huge oversupply across the market. I was asked on the BBC this week if I thought that anyone who had recently bought a house in Spain was likely to lose money. My answer? I do. And given that prices are already falling across the Costas as supply outstrips demand, probably quite a lot of it. The same might go for investors in the Spanish stockmarket. Consumer debt has risen 250% in the last ten years and is now at what look like unsustainably high levels: as rates rise and house prices come off, I think we can expect consumption to fall too, with the usual effects on corporate profitability. See our investing in property section for more on the Spanish property market.
It is telling that in this week’s Roundtable on Europe (held before the panic selling!) not a single Spanish stock was recommended, or even discussed by any of the participants. Indeed, several of them – Simon Pickard in particular – said they would far rather short than buy the Spanish index. On the plus side, the panel came up with ten excellent stocks they think you should buy and some of which I am thinking of buying (I am most tempted by Oriflame and Parmalat).
If you are more interested in a Europe fund, there are of course those run by our Roundtable participants, but otherwise Sharon Segal of BDO Stoy Hayward picks her favourite funds and we look at the Fidelity European Fund, run by Tim McCarron.