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(article from Kyero.com)

Every day you'll find one 'expert' predicting continuing doom and gloom in the Spanish property market - and another 'expert' presenting the other side of the case. This week's news stories are no exception.

Some of them are just marketing messages wrapped in a veneer of 'expert opinion' - but even real experts disagree about what's happening in Spain and around the world. Not to be left out, here's my 'expert' opinion - courtesy of an article I've been reading by a real expert - Nobel winning economist, Joseph E Stiglitz.

One aspect which economists haven't had much experience of is the increasing likelihood that economic trends will have global impact rather than stay within the relatively simple confines of a single country.

This is because of a number of factors - including currency competition, foreign investment and the increasing trend of 'developed' countries to import essentials such as food and oil. When a country can no longer control it's own inflation by manipulating pricing, it loses one of its basic tools of financial control.

That's certainly what's happening in the US now and it's something they haven't had to deal with for almost 40 years. In the 70's they experienced increasing prices (inflation) and increasing unemployment which reduced the volume of purchases (stagnation).

This was when the term Stagflation was first coined - and it's happening all over again. The difference this time is that what is happening in the US is also being experienced by many other countries. They also interact with each other as the balance of imports and exports fluctuates.

Spain's banking policies of not investing heavily in high-risk, mortgage-backed investments have spared it the worst of this aspect of the credit-crunch.

This is just as well, because Spain had its own crisis well under way before we first heard the terms sub-prime and credit-crunch from the US. In reality, the entire economy of Spain had been over-invested in it's housing market for far too long.

Despite continued warnings from the European Central Bank and the UN, Spain kept building more and more homes and prices kept increasing until there were more homes than buyers.
Just as this started to bite in Spain, the rest of the world was having its first taste of stagflation because of high-risk investments. Just as Spain needed more foreign investment to soak up the excess properties, those buyers suddenly retrenched to their own countries - further aggravating the situation in Spain.

Of course, I'm generalising - houses are still being bought and sold in Spain - by Spanish and foreign buyers, but the volume of transactions has decreased dramatically.
Even though the causes of stagflation in Spain are different than in the UK and US, the effects are the same - high prices, high inflation, high unemployment.

In the mid to long term, this cycle will reverse but it's worth remembering that governments in this situation can't use any of their normal tactics to control all three of these variables at the same time. They simply have to allow market forces to run the show for a while and hope they can ride the storm (before the next general election).

The only action they can take with relative impunity is to provide financial incentives to businesses to generate revenue. Unfortunately, the entrepreneurial urge is not one of Spain's traditional strengths.

If I were in Zapatero's shoes (pun intended), I'd make the Spanish property market the most transparent in Europe by:

Publishing accurate housing statistics and making them available to everyone for free. This would put an end to the senseless speculation that drove the market to unsustainable highs in the first place.

Passing laws to remove the uncertainty of 'illegal housing' and 'land grab' which are currently holding back potential buyers.

Increasing the stock of long term rental property by raising taxes on hundreds of thousands of second homes sitting empty.

I expect the property market in Spain to bottom-out towards the end of this year, perhaps early 2009. I say this because there are already signs of serious investors entering the market and buying up thousands of bargain properties. These investment-fund buyers know they're probably not buying at the very bottom of the market, but they are buying at a substantial discount over where prices are likely to settle.

My hope is that between now and the upturn, Spain will apply their common-sense banking practices to their housing market and make it the envy of Europe. In doing so, they'll not only provide Spain with a more viable economy but they'll export some of that much-needed stability to its trading partners around the world.

Martin Dell, Kyero.com

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