Cheaper Debt at a Higher Price: It’s All a Fake Recovery

Pilots landing passenger planes swiftly in Spain usually get an ovation.

Landing in Malaga, in Southern Spain, this ovation also has rhythm.

Clap…clap, clap…clap.

There is sometimes even an ‘Ole!’ or two thrown in there. After all, southern Spain is well known for its flamenco music and dancing.

It’s one of the things you may first notice when landing at Malaga airport, Malagueños like to party, and they’re very friendly.

The second thing people may notice is how bright the sky is, there’s a lot of light around.

In fact, that is how the area became a popular tourist destination. Years ago, many of Malaga’s hotels lured in northern European tourists, who were sick of the cold and rain, by promising a refund if it rained during their holiday stay.

With 320 days of sun a year on average, let’s just say hotels were playing their odds well.

The day I last landed in Malaga, a winter December day a few weeks back, it was 20 degrees and sunny.

Landing in Malaga this time, though, there was a third thing I noticed immediately: there were a lot of construction cranes in the sky.

Regular readers of this column know that I often talk about Spain and the property bubble the country suffered in the early 2000. After seeing a boom, property fell by about 40% and employment collapsed.

It’s something that the country has struggled to recover from.

13 years on we hear there is a new property boom and once again we see cranes in the horizon. We hear that there’s a recovery on its way, there’s more construction and more movement.

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Is this the recovery we have been waiting for?

It seems so on the surface. Yet, dig a bit deeper and things aren’t as great as they seem.

I know it’s a small sample size, but several people I spoke to still complain about the same problems. High unemployment, low salaries and high cost of living…Unemployment is still at a high, at 14.2%.

Construction may be moving and property prices may be increasing, but there’s still a lot of unfinished and empty building projects in Spain from the last property bubble.

And rents are soaring. In fact, between 2014–2019 rentals on average have increased by 50%.

Property may be melting up, but this still looks far from a real recovery to me.

I say this because it’s not higher salaries that is pushing property up, but zero interest rates.

Low interest rates are supposed to boost spending and allow governments to borrow more at cheaper rates.

It may look good on paper, but they aren’t working. These low for long interest rates are depressing growth, and creating stagnation. They are also boosting asset prices.

In Australia, I hear a somewhat similar rhetoric to Spain. Three interest rate cuts this year are pushing a housing recovery once again. We’re already starting to see ads pop back up for buying property.

As the Australian Financial Review reports:

Dwelling values in the country’s two largest cities have jumped ahead in the first three weeks of the year, with the rising market pushing the median price of Melbourne units to a new high of $550,000 after surging by 12.2 per cent over the year to December.

Data provider CoreLogic’s daily index on Wednesday showed Melbourne home values jumped 0.8 per cent in the first 21 days of January, while Sydney values gained 0.7 per cent. That growth was more than double the 0.3 per cent seen in Brisbane-Gold Coast values, Adelaide’s 0.2 per cent and Perth’s 0.1 per cent over the same time.

The acceleration in property prices witnessed at the end of last year shows no sign of abating. Pent-up demand from house buyers suddenly back in the game after laying low during the downturn is pushing home-buying intentions to a record high, according to Commonwealth Bank’s latest household spending index.

Higher property prices and no salary growth are making property less affordable.

The latest Annual Demographia International Housing Affordability Survey shows that Melbourne and Sydney rank as two of the world’s cities with some of the least affordable housing, behind Hong Kong and Vancouver, as you can see below.

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Source: Demographia

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And this is even with the recent property price drops.

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House prices to income ratio has doubled since 1987/92 to 2019.

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Source: Demographia

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Low interest rates may make it easier to borrow and buy property, but at the same time, they push property prices up and decrease affordability.

How many people in Australia — or Spain — can comfortably afford to buy property?

The average person is not seeing any sign of these property gains. Instead, they see their salaries stagnate and costs of living increase.

It’s all a fake recovery. There’s only so much property that can go up if it’s not accompanied by salary gains.

Selva Freigedo,
Editor, The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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