Renting in Spain: A new bubble?
Renting in Spain: A new bubble?
Investing in property, and even renting in Spain has been a roller-coaster these past 10 years, things are steadier now, but homeowners knuckles are still white from all of the excitement. The fall of Lehman Brothers in 2008 led to the collapse of economies across Europe, the US and beyond.
A brief history
Spain at that time, dependent on the housing sector both for employment and liquidity was a timebomb...which exploded catastrophically.
As the fifth biggest economy in the European Union with a GDP of $1.6 trillion, Spain could cause lasting damage to the whole bloc if not handled with extreme caution; the economy is so big that the European Central Bank (ECB) would not have been able to rescue Spain if the situation worsened.
The stakes were very high.
Housing prices fell by 10% within one month leaving owners with an average of €30,000 in negative equity. The government was quickly changed in a landslide election and dutifully followed the ECB’s obligatory austerity measures in return for a cheap bailout of the - on the brink of collapse - banks.
Reform was made to Spanish labour law, making for more competition and less stagnation, and still it took Spain 8 years to recover to 0%, with interest rates flatlined at near 0% throughout. The worst of the crisis was felt from 2012 to 2014 when unemployment hovered above 25% (youth unemployment at an unsavoury 50%). People were selling their properties as the only option at rates of up to -50%. It was either that or repossession by the bank.
Spain’s economy is currently one of the healthiest in the Eurozone with financial indicators all pointing towards good news. The tourism industry in Spain pays for 16% of Spain’s total revenue; money that comes in from heavy pocketed English and German tourists.
The East and South coast benefit from seasonal surges in employment, and the catering industry gets a kick from this too. The housing markets in these areas have inflated prices and look very frothy. But the boom in tourism is causing a different kind of pain. Cities are struggling to house their populations as people are more eager for quick wins in short term accommodation for tourism which is pushing housing prices up nationwide.
Barcelona and Madrid have seen a recent surge in rental prices. The comparatively low price of housing has attracted people from other countries such as Germany, Belgium, the United Kingdom and the Netherlands, who have invested in property for holiday or home rentals. The government has joined other nations in offering to facilitate the visa process for homes worth more than €150000, which has attracted Russian and Chinese buyers to boot.
Due to the phenomenon of tourist apartments by platforms such as Airbnb, the cores of cities such as Madrid or Barcelona have seen the price of rent rise to almost prohibitive levels, because it is much more profitable for owners to rent to tourists than to long-stay tenants. However, this has brought much more harm than good not only to the owners but also to the cities. The best example of this is Barcelona, whose overcrowding is bordering on its capacity and causing it to drown in its own success as a tourist destination.
Source: InAtlasm from Airbnb data explanation
An inconvenient fender bender?
In comparison to its northern European neighbours, house prices in Spain are still low, and renting in Spain is still more affordable than in other countries. Those who bought at or around 2007 will now see their houses at 0% equity. But what if there was another Lehman Brothers moment?
The difference between then and now is the amount of gunpowder. Spain in 2008 was reluctant to do anything about the borrowing levels (let alone the toxic mortgages) for fear of damaging the giant golden egg that the housing sector was providing to so many people. But measures have been taken now to increase taxes and properly evaluate solvency for building projects, the huge public debt is manageable due to its low rates, and the banks are once again solvent.
The housing market is currently frothy as we can see from prices in the centres of Barcelona and Madrid, which leads people to the conclusion that another crash is just around the corner. The GDP of Spain has reached its pre-crisis level, and that is despite a current 14% unemployment rate which is triple or quadruple that of the UK and Germany respectively. Debt is being paid off and will take many years before any visibly impact is made, and the employment rate is consistently rising.
Or a full-scale economic meltdown?
Predictions are that Spain’s economy will be one of the steadiest in the coming years due to solidified infrastructure and the second biggest tourism industry in the world, not to mention the largest wind powered energy sector in the world exporting cutting edge technologies that will soon become the norm. So no problems at all, right?
This all sounds very similar to 2007. Some painful facts are the unemployment rate which is stubbornly staying above 10%, and the public debt which currently stand at €1.33 trillion (98% of GDP), more than double what it was in 2007. The addition to this debt was necessary to keep the economy afloat post-recession, fortunately these debts were managed mostly by the ECB at very low rates.
A lot of this debt is still the bad, high risk finance that caused the crash in the first place. Spain is still not at its target 3% deficit.
Politically, the country is suffering from the centralisation of local government spending, in 2009 the government took control of the budgets of regional governments such as Catalunya and Galicia, resulting in vitriol from local populations and riots in the street.
Both household and public debt are currently falling as Spain enjoys a once-again burgeoning economy, but an external occurence (don’t mention the B word) that hits the EU’s finances could cause serious harm to this, and with the political situation so volatile, who knows what could happen.
Will Spain crash again?
Soap bubbles are all round, but economic bubbles take many forms and it’s important to note the the circumstances of this bubble are different. Reform to housing is needed to prevent further holiday-let property which pushes prices up for the whole country. In the case a global economic downturn, Spain is more resilient than in 2007, but there are still some needles that could pop the bubble.
Renting in Spain
Globexs is the reference for expats regarding renting in Spain. Since 2010 we have been providing expats with affordable temporary rental apartments in Spain, mainly in Madrid, Barcelona and Valencia. If you have questions regarding renting in Spain do not hesitate to contact us.