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While Spain’s economy is still outperforming the European average, the prices increase for housing is threatens the growth and begins to cause a social problem which consequences could be disastrous for the future economy balance. “Prices simply cannot go much higher,” says Santiago Carbi?? , a housing expert and economics professor at the University of Granada. “They are near unreachable for the average Spaniard. ” More than 500,000 new homes have been built every year in the past six years, according to Barcelona-based savings bank La Caixa. In 2002, ground was broken for more new homes in Spain than in France and Britain combined.

Housing bulls are quick to note that so far the market has defied predictions of a glut. But the average cost per square meter for a new house nationwide jumped 92% in the past decade, to i?? 1,472, according to the Bank of Spain. Average salaries, however, grew by only 41% over the same period. Just ask Raquel Pascual, a 29-year-old journalist who recently bought an apartment in central Madrid. She had budgeted i?? 150,000 for a two-bedroom home in a modern building with an elevator, but had to settle for a one-bedroom, third-floor walk-up in a building built in 1936.

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The price: i?? 194,000. “The idea I had at the beginning had nothing to do with the reality of the market,” she says. “It was brutal and now I will ought to dedicate half of my salary for decades just for repaying the loan. ” Some economists argue that with the stock market still dragging its feet, residential real estate is playing the starring role. The price of housing is consequently reaching absurd levels which could be considered as a bubble. “This is a bubble that can easily burst” says Cristina Narbona. But for when this sudden drop in prices, known as a crash is expected?

Other analysts assume that price increasing is exaggerated but they don’t talk about a bubble. As Raghuram Rajam, chief economist of the International Monetary Found (IMF), advised in a interview to Cinco Dias1 “I reject the vision which argue that the Spanish Real State is going through a bubble however there is real distancing effect between housing prices and the economic fundaments”. The Spanish real estate market reached a value of $5. 6 billion in 2002, having grown with a compound annual growth rate (CAGR) of 6. 3% in the 1998-2002 period, one of the highest growth rates in Europe.

Despite this strong CAGR, growth rates in the market fell 77% from a high of 13. 7% in 1998 to a low of 3. 1% in 2002 with demand in the market tailing off. Uncertainty within many business sectors has become commonplace whilst the balance between supply and demand has also been impacted as a rash of development projects, undermining the tightness of the market considerably. Going forward, the market’s value is forecast to continue increasing whilst year-on-year growth rates are predicted to steadily increase as new projects in the office sector increase the amount of sector-specific functional units.

Market growth is also expected to be driven by the relative immaturity of the shopping centre sector in which there are number of projects awaiting completion and a number in the pipeline. By 2007, the market is forecast to reach a value of $6. 9 billion, having grown with a CAGR of 4. 3% since 2002. Year-on-year growth rates are expected to rise from 77% to 5. 4% in 2007, although this is nowhere near the 13. 7% experienced in 1998. Within a European context, the Spain is one of the smaller markets accounting for 5. 2% of value generation in 2002, a figure that is expected to decline slightly to 5.

1% by 2007, despite the market growing by 23. 2% between 2002 and 2007! The Spanish real estate management and development market has achieved strong growth rates in the last few years. This has attracted significant new investment into the market, resulting in a large number of new development projects and the entry of a number of new players into the market. The Spanish market is already considerably fragmented, with hundreds of small to medium sized businesses holding insignificant market shares. Most companies within the Spanish market focus on specific market sectors and possess limited spheres of influence.

However, there are also a number of large competitors, which have national presence and operations in two or more sectors. The leading market players include Metrovecesa, Immobiliaria Urbis and Immobiliaria Colonial. Metrovecesa is the largest domestic player, in terms of revenues generated from real estate renting activities. The company has a diversified portfolio, which includes shopping centres, business parks, industrial building, hotels, car parks and third age housing. In addition, the company deals with town planning and provides property services for third parties as well as for its own properties.

Metrovecesa’s portfolio contains properties in virtually every major metropolitan area in Spain. 1. 3 What about other Western Economies? In year 2003 housing prices increase continues to be higher than inflation in main European economies. Since mid 90’s the real estate market revaluation above inflation is a common phenomenon in the western economies. Except Japan where the little economic dynamism of the last years is having a very negative incidence in the real estate market, the majority of the families in western economies have significantly bet on the residential investment. Real estate assets are overweight in household portfolios.

Low interests rates, employment rising and the evolution of the demographic variables are some factors which support today the price appreciation in the US and European economy. A change in the interest rate could imply a redefinition of the assets of households portfolios, reducing the residential investment. However this predictable decrease could be also mitigated for an higher growth than expected and for positive evolution of the employment in western economies. In the European Union (EU), growth has not been as profitable as expected. But prices were launched to a revaluation of 4% higher than inflation for the same period.

The low interest environment has been an important factor of the demand. An intensive advance of the European economy in 2004 and the change of the employment tendency will be the incentive to impulse the housing demand which should adapt to a interest rate increasing environment. Figure 1- Source: Deutsche Bank The different situations of the main European economies are also reflected in the real estate market, with a distance in the price evolution. By the time prices are growing in a much higher ratio than inflation in countries such as the UK, Ireland or Spain and prices are stabilized or going slowly down in Germany or France.

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