US embassy cable - 04MADRID604


Identifier: 04MADRID604
Wikileaks: View 04MADRID604 at
Origin: Embassy Madrid
Created: 2004-02-20 17:00:00
Classification: UNCLASSIFIED
Redacted: This cable was not redacted by Wikileaks.
This record is a partial extract of the original cable. The full text of the original cable is not available.

E.O. 12958: DECL: N/A 
1. SUMMARY:  Recent public opinion polls show that rising 
housing prices are a serious concern of the Spanish public. 
Between 1997 and 2002, housing prices rose 78% in real 
terms.  A hot real estate market based on strong demand and 
low interest rates has fed the sharp increase.  Government 
regulation, which restricts the development of available 
land, has also impacted housing prices.  The economic 
consensus is that prices are overvalued.  Some conclude 
that a property bubble has been forming, but government 
officials and the majority of private sector analysts 
believe a gradual correction is coming without a "bubble 
bursting".  Still, given the economic implications of a 
sharp fall in housing prices and public anxiety over 
affordable housing, the ruling Popular Party (PP) and the 
opposition Socialist party (PSOE) are both making housing 
policy a central plank of their economic platforms in the 
upcoming national elections.  END SUMMARY. 
2.  The price of real estate in Spain has become a key 
issue in the run up to the March national elections.  A 
survey from the Center of Sociological Studies (CIS) 
published in December noted that 22% of Spaniards consider 
rising housing prices a serious personal concern, and 19% 
of the population considers housing to be one of the 
nation's most critical problems.  Both percentages have 
risen significantly in recent months.  Housing concerns 
were identified as the third most important personal issue 
in Spain after unemployment and economic problems, and the 
fourth most important issue facing the nation. 
3. Press coverage has focused on Spaniards' growing debt 
and the challenge of paying mortgages.  In Madrid, the 
average family requires 70% of its salary (EUR 37,383 per 
year - USD 47,103 at an exchange rate of EUR 1=USD 1.26) to 
pay the mortgage over fifteen years at an interest rate of 
4.3%.  Housing payments vary in other regions: 65% of 
average salary in Catalonia, 68% in the Basque Country, and 
on the low end of the spectrum, 39% in Murcia and Galicia. 
In 2003, Spanish personal debt reached historic levels, and 
mortgages accounted for four-fifths. 
4. The average price of new housing has doubled in Spain in 
the last eight years, rising 78% between 1997 and 2002. 
The increase in property values in 2003 alone was an 
estimated 17%.  The causes of the boom, according to recent 
studies by the Spanish Savings Bank Confederation (FUNCAS) 
and the Bank of Spain, include a scarcity of homes in the 
housing market, the Spanish preference to buy rather than 
rent, a poor rental market and a lack of transparency in 
government real estate regulation. 
5.  What is clear from the significant rise in housing 
prices in the past few years is that the supply of housing 
is lower than existing demand.  More buyers are appearing 
in the Spanish market: single Spaniards, divorced 
Spaniards, immigrants and foreign retirees.  Low interest 
rates and easy credit make these customers eager to 
purchase.  The resulting construction boom has failed to 
satiate demand or slow the rise in prices.  Spain is 
currently on track to construct over 500,000 new homes for 
the fourth consecutive year, a quantity that accounts for 
40% of total EU new home construction over that period. 
Despite additional supply, housing prices have grown three 
times as fast as salaries over the most recent four-year 
period.  Spain now has a housing price to wage ratio among 
the highest of EU countries. 
6. Spanish investment habits add additional fuel to the 
property boom.  Real estate is the chief form of investment 
in Spain, even though the Spanish stock market was one of 
the world's best performing in 2003.  According to Miguel 
Blesa, Chairman of Caja Madrid (Spain's fourth largest 
bank), 80% of Spaniards put their savings in ladrillo 
(bricks and mortar) and only 20% in financial assets.  This 
compares to a North American profile of 60% in financial 
assets and 40% in property. 
7. Unlike in many developed countries, Spanish owners often 
let their investment property go vacant rather than renting 
it out.  Some say the Spanish cultural preference to own 
rather than rent creates a weak rental market.  Others 
point to Spanish rental law as a disincentive to 
prospective landlords.  As Norman Flynn, retired President 
of the U.S. National Association of Realtors, pointed out 
during a recent Madrid visit, it takes two years to evict 
delinquent renters under current Spanish legislation. 
8. Regulation and local government real estate policy also 
contribute to the rise in Spanish property costs.  Local 
governments control the amount of property available for 
new housing, creating a patchwork of policies across Spain. 
Many critics feel that local government decisions, which 
are often made without public input, are influenced by 
landowners who want to see their land values rise.  Other 
critics see the scarcity of land zoned for development as 
designed to maximize the local governments' property tax 
income by artificially restricting supply.  Flynn noted the 
need for greater flexibility and transparency in Spanish 
real estate regulation, and he urged the Spanish to work 
towards a freer property market that can self-regulate. 
9. Many economists agree current housing prices are 
overvalued.  The FUNCAS report estimates an overvaluation 
of up to 28%, while the Bank of Spain's study calculates an 
overvaluation of 8% to 20%.  Antonio Cortina Garcia, 
Assistant Director of Economic Research at Santander 
Central Hispano Bank agrees that prices are overvalued 
between 15% and 20%.  Numerous opinion and editorial pieces 
in the Spanish press have declared the existence of a price 
bubble that might burst and lead to real price decreases 
experienced during the 1990s and possibly even nominal 
price decreases.  (Note: Nominal housing prices have never 
fallen in Spain.  End Note.) 
10. While most experts agree that market overvaluation 
exists, Cortina agrees with the position of Bank of Spain 
Governor Jaime Caruana, who predicted a gentle and 
progressive correction in the property market.  Continuity 
of current low interest rates will be a key factor.  As 
consumers have acquired 98% of new homes through variable- 
rate mortgages, an interest rate hike would have 
significantly negative effects on household wealth and 
savings, as many pension nest eggs are tied to home value. 
11. The current PP government downplays the threat of a 
real estate crash.  At year's end, Spanish First Vice- 
President and Minister of Economy Rodrigo Rato publicly 
recognized housing in Spain as expensive, but noted "this 
does not mean we are standing before a bubble that will 
involve a sharp price correction."  Only a sharp interest 
rate hike would cause such a change, and Rato believes 
rates will rise slowly and moderately from the current 2% 
to 4 or 4.5% over the medium term.  Bank of Spain Governor 
Caruana commented that Spain's financial institutions have 
"done a good job" of risk and resource management, and 
would be prepared to weather possible loan defaults 
resulting from interest rate rises. 
12. A minority of analysts asserts that Spanish real estate 
prices remain completely justified.  Angel Berges Lobera, 
Director General of Financial Analysts International (AFI) 
and Professor of Finance and Accounting at Madrid's 
Autonomous University, asserts that fundamentals fully 
justify current prices.  He cites the same inflationary 
factors as other experts, but does not calculate any 
overvaluation.  Furthermore, household debt levels and 
housing price-levels are not out of line, and have just 
recently attained average EU levels.  Not surprisingly, 
Spain's largest construction companies also join in denying 
any market overvaluation.  Fermin Molina, Director General 
at the Urbis construction company reflected the industry's 
general position: Spain's housing bubble is fiction 
"invented by a few journalists." 
13. The current PP government's denial of a housing bubble 
has not kept it from addressing housing affordability as a 
key electoral issue.  According to Vicente Martinez- 
Pujalte, PP Economic Spokesperson in Parliament, housing is 
the economic issue on which the PP is most vulnerable in 
the March general elections.  PP presidential candidate 
Mariano Rajoy pledges the construction of 900,000 new 
government subsidized homes during the next parliamentary 
term should he be elected. A new type of government housing 
category will classify 200,000 units as purchasable at a 
maximum of EUR 165,000 (USD 208,000) with a low interest 
30-year loan for those that qualify.  He also wants to 
increase the amount of units available for rent.  His plan 
calls for the creation of a new state agency that would 
work with regional governments to increase the amount of 
public land available to build rental units.  Rajoy also 
proposes the movement of delinquent rent cases to courts 
after 20 days rather than the current 2 years.  Finally, to 
address the difficulties of younger homebuyers, he calls 
for house purchasing assistance from the government for 
200,000 qualified buyers less than 35 years of age. 
14.  The opposition PSOE has also made the issue a campaign 
theme.  The Socialist party line accuses the Administration 
of enacting legislation that encourages speculation, 
failing to recognize that many citizens cannot afford 
housing, and being content with the situation although 
Spain is the EU country in which it is most difficult to 
obtain housing.  They also accuse the ruling party of 
shunning debate by offering hollow responses to worries 
over increased prices such as "When people buy homes, it is 
because they have the money to do so."  We expect the 
Socialists to increasingly emphasize this issue as the 
March election approaches. 
15. COMMENT: Though most analysts bet that any housing 
overvaluation will adjust gradually rather than abruptly, 
the PP government and the opposition are keenly aware of 
the political and economic issues surrounding the housing 
market.  On one hand, a large percentage of Spanish society 
wants housing costs to come down.  On the other hand, many 
Spaniards' nest eggs for retirement are tied up in real 
estate.  With construction driving economic growth in 
recent years, a steep decline in housing prices, connected 
with a sharp slowdown in the market, would also drag on 
economic growth.  With interest rate policy outside of its 
control, the next government will need to carefully manage 
housing policy to assist those priced out of the market, 
and to prevent a collapse of a key sector of the Spanish 

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