With the U.S. real estate market tumbling, it might be interesting to think about the European cases of possible real estate bubbles. Ireland and Spain spring to mind immediately. Let’s take a look at what the IMF wrote about Spain in June 2006:
The external position deteriorated further in 2005, with the current account deficit reaching 7½ percent of GDP. Financial institutions intermediated external savings to meet the increasing financing need of the nonfinancial private sector, mainly through the issuance of mortgage-backed securities in euro-area markets. Net external liabilities reached 46 percent of GDP.
So, who holds the mortgage-backed securities? The chance that they are (still) inside of Europe is probably very high. Hopefully this time the banks are more willing to share their knowledge with the public when they get into trouble. I wonder if nobody sees this coming. Maybe people think that Spain has no problem and things are fine?
Pedro Solbes, finance minister of Spain, recently declared that Spaniards only spend around 30% of their income on housing. If you read the comments on the article in El Pais, you begin to wonder: If Spaniards take home 1.000€ a month, then the share of housing is 350€. Anybody who knows real estate prices in Barcelona, Madrid, Valencia and other places knows that it is next to impossible to get a flat for that price. 5 years ago I paid 300€ a month for a 7 square meter room in a shared flat in downtown Barcelona. While I was there, I also read that Spaniards spend 50% of their income on their flats. And since then the house prices have increased while wages have been stable. I am not so sure if I would put my trust in the numbers of Pedro Solbes.