Vancouver; Spain – “It was certain, Andy explained, that real estate prices would not decline. The demand was insatiable at almost any price.”

“I remember in 2003 my mother had a New Year’s Eve party at our family home in Málaga, in southern Spain, at which over 80 people sat for dinner, including most of my old friends still around from high school days. That night I had one of those epiphanies (as you often do on New Year’s Eve, I guess) about the real estate market when I suddenly realized that nearly every one at the party was involved in one way or the other in real estate. Most of the people there (including my Persian sister-in-law) were real estate developers, real estate agents, real estate lawyers, architects, or owners of building and construction companies. All of them lived off (and had prospered mightily from) the real estate boom in southern Spain.

But this cannot be, I thought in my naiveté. If the only industry around is real estate, then we must be living through a real estate bubble of enormous proportions.

Later that night I spoke to one of my old high-school friends, Andy, who was at the time a prosperous real estate agent with houses in Marbella (purchased on borrowed money, naturally), a Mercedes, and all the trappings that accrue to an immensely charming and self-confident real estate agent during a real estate boom. In our conversations, and ones that took place subsequently over the next few years, I warned him that the property market in the south of Spain looked out of control, and it would be a good idea from him to diversify his savings out of real estate.

Same old same old

Of course Andy didn’t. He explained to me that what we were seeing in southern Spain was not a bubble because there were very strong reasons to believe that real estate prices were undervalued and were going to rise a lot more. Europe, he told me, is aging rapidly, and old people, as everyone knows, like nothing better than to retire in some warm and sunny place, preferably on the beach. With an infinite supply of European old people and limited European beachfront property, mostly in Spain, Italy, and Greece, where in addition you had great food, warm-hearted people, and plenty of immigrants to keep the prices of services (and servants) down, it was certain, Andy explained, that real estate prices would not decline. The demand was insatiable at almost any price.

This seemed like a perfectly reasonable argument on the face of it, and it was widely proposed to justify ever-soaring Spanish real estate prices for many years, not just on the Spanish coast but also, perhaps a little bizarrely, in every nook and cranny of the country, including some pretty gray and inaccessible building projects outside cold, northern industrial cities.

The weakness in the argument, of course, was that although there might have been near-infinite demand, this could not justify near-infinite increases in prices, especially since the demand itself was likely to be highly pro-cyclical because the Spanish economy had itself become dependent on real estate development.”

– from ‘The unacceptable behaviour of the market’, by Michael Pettis, at, 17 Jul 2012

“Same old same old”, indeed.
Change the date, and a few words, and Vancouver fits like a glove.
– vreaa

16 responses to “Vancouver; Spain – “It was certain, Andy explained, that real estate prices would not decline. The demand was insatiable at almost any price.”

  1. While there are parallels, one must travel to Spain to see how significant its construction industry was. While Vancouver has construction ups and downs I don’t think it’s in that league.

  2. Renters Revenge

    “At its peak in 2007, construction had expanded to a massive 16% of the total gross domestic product of the country and 12% of total employment.”

  3. Pingback: Vancouver; Spain – “It was certain, Andy explained, that real estate prices would not decline. The demand was insatiable at almost any price.” |

  4. Same phenomenon. Different place. Very slightly different point in time. Human folly is eternal.

  5. Spanish real estate is now down 30% to 50% from the peak (depending on location). You wouldn’t know that from official stats though, since the main purpose of official stats is to protect the banks.
    Costa del Sol has crashed especially hard and now it’s one of the cheapest nice locations in Europe.

    The official (though overstated) unemployment rate in Spain is 24.6%!
    I wonder how many of these unemployed people are former real estate agents or construction workers.

  6. And the kicker :

    “Spanish banks are looking stronger than ever amidst an unprecedented financial crisis across the globe.”
    – Forbes, October 2008.

  7. Carioca Canuck

    I was in Marbella and Malaga in 1995 for 2 weeks, and the amount of empty houses and apartments I saw while I was there was staggering, even back then. Asked our local company rep who was our escort what was up, and he filled me in on the mini-boom caused by all the German money purchasing holiday real estate.

  8. More to the point… If it can happen in a place where the weather, to put it delicately, is consistently a ‘tad’ nicer… And where CivilSociety still functions (after a fashion)… How will it likely play out in YVR?

    I used to enjoy thinking about things like that while perched, Rodin-like, atop the Greco-Roman ruins of Empúries….

  9. Someone may have already posted this link, the comments are interesting.
    “A pre-existing over-exuberance”

  10. I was in Spain last October. Yes, extremely significant over-building, ordinary people caught hard in the downturn, construction was a huge chunk of the economy, all that “felt” true.

    One of the most significant conversations I had there was with an intelligent aware person (owner of a B&B we stayed a few days at) who owned 4 apartments, un-rentable, un-saleable without bringing money they didn’t have to pay off the big difference between the mortgage and the price it would take to actually get a sale. The official value is a lot higher! If you wanted it to sell, discount it 50%.

    We were considering buying once the market breaks wide open and price discovery happens, so we asked if a place could be rented out to fully cover local management, taxes, fees, maintenance etc. No mortgage or profit, just a full cover of all costs. They thought not! Too many empty properties, no demand, too many owners willing to rent at a loss, better than sitting empty, being looted and squatted in for an even bigger loss.

    Banks won’t sell the growing inventory of foreclosed property because they have to recognize the loss, mortgaged owners don’t sell because they are too far underwater, nobody buys because it’s obvious there are far more price drops to come. The very few people who own outright and didn’t participate in the collective insanity don’t sell because it’s their home that has been in the family for hundreds of years.

    Illegal homes without proper permits are very significant as well, sitting in a legal limbo with no taxes but annual fines conveniently just a bit higher than the taxes would be, also sitting empty and un-saleable for a lot of them.

    Some villages tripled in size during the boom, and started with a surplus already! And it was, of course, justified as different there for all the usual reasons by those profiting off it.

    I don’t think it’s different here.

  11. Pingback: Perth vs. Vancouver Real Estate, Part 1 Flotsam and Jetset | | Vancouver Realty News BlogVancouver Realty News Blog

  12. Im waiting to buy a house in Spain.A country house 5 to 20 K away from the drab concrete settings of the coast.I used to live in Gibraltar in the mid 80s when the Costa Del Sol was pretty much sand dunes and an acre of waterfront was $40,000.
    We will buy in 2014 which is when we would be happy to pay $150K can for a detatched Villa with Ocean views and a pool.I have no idea if the market would be at the bottom then but that is one hell of a deal and we would be very happy to purchase at that price.We have duel Citizenship .

    I have to disagree with the comments about a housing crash here in Vancouver.
    Its pretty solid on all fronts.There may be a level or even a 10% correction but there will be no crash.
    I used to think there would be a crash (since 2004) but after much thought I became aware that as crappy as Vancouver is during the winter etc its still the warmest and most interesting place in the entire country to live.Our banking system is tight.Commodoties + resources are in abundance.
    Canada is rocking on the business front as is evident in the real estate prices across the country.If you have cash its a very safe country to bring your treasure to.
    Its just not comparable to Spains economic woes and the parralel is stretching it a bit.

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