The last time I reported on the Spanish housing market in August, we were in the midst of a bank deposit run caused by the redenomination risk. This was pre-OMT. At the time, we saw an acceleration in the house price declines. House prices were down 11.2% year-on-year through July.
Things have got worse since, with house price declines accelerating to 15.2%, according to official statistics. At the same time, Cinco Dias is reporting that Spanish national debt will soon pass the 100% debt to GDP level and is at the highest relative to the economy’s size since 1912.
The fear here has to be debt deflation because of the negative impact declining house prices will have on collateral for loans and bank loan losses. This is especialyy critical gven the dire state of the Spanish banking sector which El Pais reports is completely beholden to the ECB for liquidity. The debt deflationary path is especially of concern given the continued austerity the Rajoy government is meting out in order to cut Spanish budget deficits, all while unemployment rises to Great Depression levels above 25%.
Here’s what I see. Spain’s house price rise was at the top end as compared to other housing busts in Ireland, the US, the UK, Latvia, and elsewhere. Prices have now declined nearly 40% in Spain, but have declined by 50% in Ireland. And as a reference point, house prices declined by 80% in Japan after its bubble. As I wrote back in May, “Willem Buiter, chief economist of Citigroup, reckons Spanish property price declines are less than half complete. To wit, the most recent data from Spain shows that Spanish house prices declines are accelerating, with prices falling 7.2% in the first quarter of 2012.” And since house price declines are still accelerating we should expect more losses to come. Buiter may be right that prices will fall some 50-60% based on his estimate that we were only halfway there in Q1 2012. That means houses in Spain could drop by a third from present levels.
Clearly, nothing good can come of this when you have government cutting to reduce deficits, the private sector cutting to reduce high leverage, high unemployment, and declining asset prices. To date the OMT prgramme has been largely successful in allowing the Spanish government to avoid the bitter pill of seeking a bailout. But I see no real opportunity for the situation to get any better for at least the next 12-18 months. Goldman predicts no growth until 2015. Meanwhile the Spanish sovereign, with sovereign debt to GDP already approaching 100% will need to provide liquidity for regional governments and bail out its banks. There are no scenarios in which that won’t lead to a Troika bailout of Spain irrespective of the OMT.
The situation in Spain looks bleak.