Housing Hell in Spain and Oz

Expats' dream life in the Spanish sunshine has turned into a property nightmare. Welcome to Helldorado.

In Southern Spain, bitter expats talk about "Helldorado" - paradise that has mutated into a nightmare. Tumbling property prices, a glut of new properties still flooding onto the market and rising Spanish interest rates are taking their toll.

Added to this, illegal building practices mean that 100,000 coastal homes are now under threat of demolition. And to make matters even worse, the pound has fallen almost 12 per cent against the euro over the last year, leaving many British residents even further out of pocket.

Half the 80,000 estate agents in business at the beginning of 2007 were closed by the end of the year. Demand for cement is at its lowest level in 11 years as developers stop building.

And yet by the end of this year, there will be an estimated one million unsold properties on the Spanish market. Another two million lie empty. Add to that the global credit crunch and mounting Spanish interest rates, and as one real estate agent put it this week: "It's like the UK situation on steroids."

Thousands of Brits who saw the opportunity to make a quick buck out of Spain's property boom have had their fingers burnt. Many bought flats "off-plan", putting down 30 per cent, and hoping to sell before completion and make a vast profit. But "flipping on", as it is known, goes horribly wrong if the property will not sell at all.

The problem for thousands of British property owners has been further exacerbated by a series of scandals involving illegal building practices which have deterred thousands more from buying.

During the frenzied years of building, many local town halls apparently turned a blind eye to planning regulations or even took bribes to grant building licences to thousands of homes that were constructed on protected land. Recent crackdowns by regional and national governments have led to the arrest of dozens of planning officials, and thousands of homes are now under threat.

Earlier this year, that threat became a reality for Len and Helen Prior, who sold their family home in Berkshire and built a £350,000 retirement villa in the seaside town of Vera in Almeria five years ago. From the start they did everything by the book, employing a reputable lawyer and obtaining a building licence from Vera town hall before the property was built.

What they didn't know was that behind the scenes, the regional government in Seville had already warned town hall planners that the development should not go ahead because it entailed urbanisation of "rustic" land.

In January, the 64-year-olds' house was demolished in front of them after a dramatic stand-off during which Mr Prior, who has a heart condition, collapsed and was taken to hospital. Four months on and the pensioners are living like gipsies on the land they still own. "We have nowhere else to go," says Mrs Prior.

Sydney Properties Fall In Half

The Daily Telegraph is reporting Sydney properties halve in price.

HOUSE prices in some parts of Sydney have almost halved as battling borrowers struggle to keep up with increasing interest rates.

The falls - in Sydney's west, the Hills district, and Sutherland Shire - are far steeper than previously thought, and show the devastating effects of the RBA's rate-hiking spree.

The data - complied exclusively for The Daily Telegraph - showed that even the more affluent suburbs are now beginning to suffer. Several homes in Waverley, Coogee and Paddington were sold for losses of more than 25 per cent. The worst hit was the Waverley house bought in July 2003 for $725,000 and sold for $465,000 in March.

And experts predict that the losses will get worse as the year goes on.

Shane Oliver, chief economist at AMP Capital, said: "The pain of higher interest rates has only just started to kick in and we will see further falls over the next 6-12 months.

Red Peppers, Chicken, and gasoline vs. Home prices.

Let's see. Home prices are down hundreds of thousands of dollars in the US, Spain, and Australia. But let's stick to just the US. You can still get a whole chicken on sale for $.69 a pound. Red peppers jumped From $1.99 lb to $3.99 lb over a year ago and stayed there week after week. That is a huge increase but I did just get some at what now seems a bargain price of $1.99 lb. when the previous bargain price was $.99.

For the sake of argument let's say food has doubled.

The less meat one eats the more likely that assumption is, if indeed it is not higher. Buy meat on sale and I bet the total is more like 1.5 times (or less) in the last 5 years. Since I do the shopping, I know. I will also admit I have seen a lot more tricks and traps recently like canned pop specials 3 for $10 that use to be 4 for $10.

Add in the price of gasoline constantly rising and it is causing consumer heart attacks.

But let's be serious here: It takes one hell of a lot of increases to make up for falling home prices. A $200,000 decline in the price of a home (or even a $50,000 decline) is several orders of magnitude more important than the doubling of the price of cucumbers, milk, or eggs.

However, people do not buy houses every week although they may buy milk and gasoline every week. So inflationists have everyone screaming inflation when the big picture is falling asset prices and banks in a mad scramble to raise capital.

The mad scramble to raise capital proves there is "mark to market" credit contraction because Citigroup and others would hardly be raising money at 8%+ with the Fed Funds rate at 2.00% were it not the case.

So while some point out rapidly rising prices of peppers, milk, and gasoline, it's important to remember that $200,000 will buy one hell of a lot of the above. On the other hand, renters never saw the rise (or fall) in home prices, but they did see the rise in the price of food.

But it's still worse yet, because the rise in inflation (money supply and credit) fueled asset prices in the 1990's, the housing bubble from 2001 to 2006, and stocks from 2003 until recently. None of this was properly measured for the simple reason it is impossible to measure the effect of credit inflation on the stock market or housing market. So... the Fed ignored it all.

Add it all up and it's virtually impossible to put together a basket of goods and services that measures anything accurately. If that is not bad enough, the government, because of social security payments has every reason to understate rise in consumer prices.

This is of course why a focus on prices, especially the CPI, is dead wrong. The CPI is not a valid measure of inflation. No measurement of prices is a valid measurement of inflation. A representative basket of goods and services can neither be put together or measured, not here, nor Spain, nor Oz, nor anywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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