I’ve been criticised for being pessimistic and dampening growth because in at least my last two Blogs, I’ve mentioned that there is a possibility of there being a local property bubble and that the market is aiming for the same cliff edge it’s crashed over many times before. In economic isolation, as long as the money keeps coming, the developers will keep on building as that’s what they do. However, the problem arises when there is an international collapse and the money stops. The local growth isn’t sustainable and so the Spanish property bubble bursts again. It’s on the way, as predicted by the IMF.
It can be avoided or certainly reduced by prudent construction guided by accurate occupier demand rather than investor led demand. Looking around the Costa del Sol at present there is so much resale property available, and yet builders are piling on more new accommodation. Forgetting about international finance, the sure result must be that the values of all the properties will drop as current individual owners become more desperate to sell their properties and so lower their prices. The difference between new build and off-plan is currently substantial and that is going to increase. Eventually, the potential occupier buyers of new build will come to their senses and see that they can get much better value for money buying a resale, than they can buying new and instantly owning a property that can only be sold for much less than they bought it for, with the selling costs even reducing that. When that happens, the new builders will have to severely discount their prices and so the overall value of property in the area drops.
Surely, it would be more sensible to stabilise the number of properties being built and thus sustain the values of the existing property collection, avoiding wastage of resources and ensuring that owners and buyers can be economically secure. And that, of course, is the same for the builders and their employees and their financiers and those who finance them. Ignoring the local politics, the benefits of restricting a headlong rush to build can be seen in the experience of the Balearics, which has a very strong anti-development policy that was a major reason for their property market not crashing nearly as far as the rest of Spain in the recent 10-year crisis. The value of the existing property has probably risen due to supply more equally matching demand, but at least there is less disastrous collapse of personal and financier wealth with the highly unpleasant consequences for all involved.
With the weight of money in the world, largely built of very shaky foundations, the tap is unlikely to be turned off there. With individuals and families seeing the equivalent of lottery wins in the sale of land, that’s not going to stop. In between, we have the politicians and local authority planners and economists, and they are the only ones who can bring sense to the glut of permitted building. Do they have the political will or courage to do so, even if they can see that it makes sense? Well, their record on anything except short-term benefits and votes does not give any hope at all.
For property valuers, we have to follow the market up as that’s what the comparable evidence shows. The Bank of Spain appears to try to control lending at least by varying its instructions to tasadores, but really that should be to the banks on the percentage of value permitted to be lent. However, that would be seen as to obviously manipulating a ‘free’ economy so it’s easier to not too subtly frustrate buyers and lenders by enforcing low values when they want to hold the market back and encouraging higher values when things get too sluggish. The EU is putting forward ideas that valuations shouldn’t be at a point in time, but looking at a time spread of values in the past and gazing into the future. For valuers, that’s a sure recipe for claims against them as future thinking is bound to be based on the past graph extending along similar lines and thus them being caught out, like everyone else, every time the market dips or rises.
So, let’s all keep working on the short-term, and hope that when the collapse comes, we’ve just sold at the peak and can wait with our profits to invest them again when the bottom of the crisis is reached. That’s all any individual can hope for in this big world economy rollercoaster.