The western world is quite probably on the brink of a recession, and possibly even of a depression. The property boom which has driven more than a decade of economic prosperity in the United States, Europe and the countries on the Mediterranean fringe is stuttering to a halt. Is anywhere safe – even a jet set hideaway like Mallorca?
Despite interest rate cuts on both sides of the Atlantic, the shocks keep on coming. Deutsche Bank analysts predict that total bank losses worldwide as a result of the sub-prime crisis could end up between $300 billion and $400 billion. Citigroup, the largest bank in the world, has written off $6.1 billion and lost its CEO. Morgan Stanley has written off $6 billion and Merrill Lynch $8.9 billion – while Bear Stearns is being sold for a fraction of its former value. But despite those extraordinary figures, the real losers are the millions of home-owners across the States who are facing foreclosure.
Even those managing to hang on are paying the price. Latest statistics from Merrill Lynch show that in the third quarter of last year, total housing wealth in the US declined for the first time in 14 years – by an almost unbelievable $128 billion.
One doesn’t like to be too negative – but it gets worse. According to the highly-regarded S&P Case-Shiller Index of US property prices, the value of American homes, which fell by 6.4 percent in the year to last October, will continue to fall and won’t reach rock bottom until November 2010 – by which time they’ll have plunged at least another 13 percent. It’s impossible to break news like that gently.
The relevance of all this to Mallorca? Simple: we need to know how bad things are.
The sub-prime crisis began in the United States with the repackaging of bad-quality mortgage debt which was sold on throughout the global financial system in the form of derivatives. If the US goes into recession, Europe will follow. And even if it doesn’t, is it likely that Northern Rock is the only nasty surprise lurking on this side of the pond? Not very. And don’t forget, there have been some very shaky moments for the Spanish mainland property market over the past 12 months … not to mention a very nervy over-reaction on the European stock markets to Société Générale’s recent rogue trader.
The good news for Mallorca, however, is the spread of nationalities it attracts – British and Germany buyers certainly, but also Scandinavians, increasingly Russians, and occasionally the Irish, who’ve been some of the most active property buyers in Europe since the mid-Nineties. The question is: are conditions in their home economies such that they’re likely to continue to buy?
It’s inextricably linked to the US. We’ve already seen the run on Northern Rock. The number of domestic property transactions is falling, as is the volume of new mortgages. Yes, the British are enthusiastic second-home buyers and like to retire to sunny climes like Mallorca, but credit is drying up and they’ve been scared by over-supply and falling prices on the Costa del Sol. The lower end of the market will probably contract, while jet set buyers will party on – though they’ll probably look for better value.
It may be nextdoor to Britain, but the market there is different. Property prices have risen by multiples over the past decade, interest rates have been low, 100 percent-plus mortgages have been routine, and buying abroad has become a national sport. Now however the economy has turned and prices are falling. Some developers are selling two-bedroom apartments in Dublin at €100,000 discounts. And buyers are becoming wary, realizing they’re at the top of the market. Property in many overseas markets still seems like good value in comparison to Irish prices, but the buying frenzy is probably over.
IKB Deutsche Industriebank was the first European bank to get into sub-prime difficulties last year, and had to be rescued by the German government’s financing bank, KfW. The good news now, however, from a German confidence point of view is that Deutsche Bank, while it will have to write down €2.2 billion in loans and mortgage-backed assets, is still on target for a pre-tax profit of €8.4 billion. Broadly speaking, mortgages have always been much more difficult to get – and more expensive – in Germany than in Britain, and so are typically better quality. Germans who buy abroad are likely to continue to buy, especially where they’re confident of the market.
The Swedish economy went through a major crisis in the early Nineties, but has since recovered and the country is now among Europe’s wealthiest nations. Interest rates are low and, as a result, the domestic property market is booming and Swedes have become big foreign property buyers, particularly in Spain, but increasingly in Thailand too. Danes too have become active buyers, particularly in Berlin, but also following the Swedes to Spain. Can it last? Some financial products being sold by Sweden’s Nordea bank have been downgraded by Moodys rating agency, but nothing has spilled over yet into the real economy. As long as that continues, buyers feel confident.
Russians buyers who are in a position to buy overseas are unlikely to be affected by anything as mundane as a mortgage credit squeeze. Wealthy Russians have been buying busily everywhere from the Costa del Sol, to the Côte d’Azur, to Montenegro, to Ukraine, and particularly on the Black Sea coast in Bulgaria, where they’ve taken up a good deal of the slack left by a fall-off in British buyers this year. The origin of some of the Russian cash is occasionally questioned – but is it ever refused? Probably not.
The most important thing for Mallorca will be to continue to differentiate itself from the faltering mainland Spanish market, something it has so far managed successfully to do.
There must be every likelihood that the cheaper end of the market will slow during the remainder of 2008 – but as long as Mallorca remains in favour with the jet set, the high end should remain high.The broad spread of nationalities who buy property on Mallorca could shelter the island from the worst of the sub-prime crisis, writes Peter Cluskey.