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Cosmopolitan Property Buyers Still Holding Their Breath

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February 1, 2011


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It’s like waiting for the axe to fall! Will Portugal follow Ireland and Greece and turn to the EU and IMF to avoid defaulting on its sovereign debt? And in this cosmopolitan world of interdependent economies, will Spain be the next domino to fall – bringing the very survival of the euro into question?

Despite our apparent economic and monetary sophistication, the fact is that nobody really knows. Greece said it didn’t need aid. Ireland said it didn’t need aid. But in the final analysis, both countries took the cash. On that basis, nothing the Portuguese or Spanish governments say should be taken at face value.

But here’s the view of one of the world’s leading economists, 2010 Nobel Prize winner, Christopher Pissarides of the London School of Economics, one of those who believes that if the Spanish economy does collapse, the threat to the euro may indeed be too overwhelming to resist.

“If Spain collapses the way Greece collapsed, for instance, then in my view even the stronger European countries, and Germany in particular, would probably be unwilling or unable to accumulate the funds needed for a bailout.

“On that basis, I would say that EU policymakers need to seek a more fundamental solution instead – and one of the possible solutions would be if Spain were to revert temporarily to the peseta.”

Despite a successful bond auction in the middle of January – just a matter of weeks ago – concern that Spain won’t be able to reduce what has become the eurozone’s third-highest budget deficit has driven up the cost of finance for Spanish banks – which have more than €30 million in debt falling due over the next four months.

Even so, the likelihood of dramatic pre-emptive action by the EU or the Spanish government still appears to be remote. There’s no political appetite for a return to the peseta and the admission of failure that that would entail. Paralysis, it appears, is the order of the day.

“Throughout this whole crisis, including the current threat to Spain, the response of policymakers in Europe has been terribly reactive”, says Russell Jones, Global Head of Fixed Income Strategy at Westpac Banking Corporation, Australia’s oldest bank.

“That’s just giving a greater incentive for the markets to continue their speculative attacks on various bond markets – and driving this further on towards a rather unpleasant conclusion.”

Here on Mallorca, Michael Cunnington of real estate agents, MJC Associates, who work with Savills, agrees that political will – and perhaps even backbone – appears to be in unfortunately short supply.

“As in other countries, political will in Spain tends to be very much short-term orientated”, Cunnington told abcMallorca. “And the problem is that, as elsewhere, opposition parties tend to simply criticize the government for whatever measures it takes, without proposing any sensible alternatives.

“But with an unemployment rate of 20 percent, Spain certainly has a long way to go before it sights recovery – and the banks in particular still have to reconcile the exposure to property on their balance sheets.”

And yet as 2011 gets into its stride, the state of the property market on Mallorca could be so much worse, according to Daniel Chavarria Waschke, the spokesman for Engel & Völkers, which operates in 40 countries on five continents.

In its end-of-year review for 2010 and preview of 2011, Engel &Völkers says total sales on the island for 2010 ended at pretty much the same level as in 2009 – with the average value of sales in the south-west at around €1 million, and the average value in the north settling in or around €850,000.

“All in all, 2010 closed somewhat better than we expected following a slow summer”, said Chavarria Waschke. “Our indicators show that the market is now stable, with slight price increases – if any – expected towards the end of 2011.

And yet in some parts of Spain, the market appears to be back almost to where it was before the global property crash – with plenty of money washing around for 100 percent finance …

In Murcia, for example, one development is advertising plots of land of 228 square metres for just £25,000 sterling a throw. There’s apparently 100 percent finance available on the plots. There’s a 133 percent buy-back scheme after three-and-a-half years. The developers say you can build your own three-bedroom detached villa for a total of £85,000 sterling including the land and building costs – which is 50 percent below the market value of comparable properties.

The development is somewhere in the region of Lake Argos, where, the advertising tells us, Paramount Theme Park has announced it’s building a new resort which should attract three million visitors to the area and create 20,000 jobs. There’s even a new airport planned for this very year.

In some lucky corners of Spain it seems it’s just like the old days – with not a qualified promise, a “maybe”, or a nod to the ailing state of the Spanish economy anywhere. Caveat Emptor.

And yet broadly across Spain, the latest figures from the statistics bureau, Instituto Nacional de Estadistica (INE), show that residential property prices fell by 2.2 percent in Q3 2010 compared with the same period in 2009. The prices of both new and second-hand properties are falling – down 2.6 percent and 1.8 percent respectively on the year.

Madrid was the only region to have marginally rising prices in Q3, up 0.9 percent compared to a year earlier. Andalucia had a fall of 2.2 percent. The Balearics were down 2 percent. The Canaries dropped 2.9 percent. And the biggest fall of all was Cantabria, down 6.7 percent.

All of this, according to the Bank of Spain, means prices are already back roughly to 2005 levels and could fall further. So Mallorca’s cosmopolitan property buyers are holding their breath. They can find substantial value today – but many investors believe we still haven’t seen the bottom yet. Another few months of 2011 should tell.

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Peter Cluskey

Peter Cluskey

An Irish journalist who worked for some years as a war correspondent for the national television station in Ireland – RTE. In recent years, he has specialised in writing about the real estate market worldwide – focusing particularly on the luxury second home destinations. He is a sought-after contributor to a number of international property publications, based on his reputation for well-researched and excellently written articles.