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Are you fed up with reading about how "there has never been a better time to buy?"  I know that I am, but does this mean that the statement is untrue?

For a short while I worked with a group of UK investors who would meet regularly and spend hours reviewing analyst reports, charts and argue amongst themselves as to the direction and trend of quoted stock.  In addition to the usual commodities such as oil and gold, we also had a special interest in housing stock.  Most of us owned property of one type or another and despite our flirtation with equities, probably the largest investment we each had was in the homes we all lived in.

Years later, many of the brokerage firms who commissioned the much cherished reports have fallen by the wayside.  Some firms were accused of misrepresentation, whilst others just got it wrong.  The property bubble did finally burst, but predictions as to the  exact timing managed to elude us all.

Markets can react in unpredictable ways, and none more so than the housing sector.  However, fundamentals do ultimately have to be taken into account. 

Domestic property values behave no differently to those of any other traded stock, where only two factors drive price. These are simply supply and demand.  If you want to understand where house prices are heading, you need to take a closer look at what is actually driving them.

Firstly, demand. Are there plenty of people wanting to move to Spain and in a position to do so?  The answer has to be a cautious 'yes' as the low cost carriers are nearly always full, even outside of peak season.  The reason maybe simple, people want to live where the weather is better, and will continue to do so as long as the sun shines in Spain and they have access to capital. 

The problem is that the availability of finance has been throttled back, and with the downturn in the world economy, there is less job security.  In the UK, as in Spain, house prices are impacted by the buyers ability to pay for them. If unemployment rises, house price inflation becomes unsustainable.  If you plot house inflation on a chart next to interest rates, you can see that at times of low interest rates, house prices consistently rise. Governments have long since used interest rates as a way of controlling house price inflation. However, the same chart today tells a different and more complex story. 

Interest rates are at a historical low and yet house prices have been falling! What has gone wrong? There appears to be no precedent for this, but at its roots lie the chaotic nature of all markets. At this point I should mention that there are two further destabilizing elements that affect all markets.   These are panic and fear.  Just when you think you understand what is going on and can make safe predictions, the two strongest emotions come into play and cause unexpected price behaviour.  Fear of job losses and the panic of not being able to sell quickly enough have created a plethora of genuine bargains, both in new and re-sale property.

My own view is that the housing market is close to capitulation, the last people to realise this are the media and analysts.  Artful traders know how to read the signs and just when sellers are flooding to the exit, they are heading the other way to take advantage of the bargains.

Now let's take a look at supply.  OK, I am just going to talk about Spain here, although I do think there are some interesting correlations with the UK housing market as well.  With over 4 million unemployed (at the time of writing,) one could be forgiven for thinking that the Spanish economy was in deep trouble. Maybe it is, but one of the most successful banks in the world, Santander, remains Spanish owned.  Lending practices were tightened in Spain after the last crisis in the 80's and for the most part, the banking sector remains strong, although the availability of credit remains tight due to the stubbornly high Libor rate. (The rate at which banks lend to each other).

One problem is that there continues to be over supply in the new housing sector.  Every day hundreds of newly built properties reach completion with no buyer to move in.  This has caused a glut in new housing stock and remains a solid block to house price inflation. 

Markets can be likened to a piece of long elastic, as they will stretch and stretch until suddenly snapping back before travelling too far in the opposite direction.  The over supply in new build means that new developments, as well as those in the pipeline, have all but stopped or have been put on hold, but people still want to buy them, even if they lack the capital. 

What does all this mean for Spanish house prices over the next few years? My own view is that there remains plenty of pent up demand, and that the downturn has been overstretched like elastic, fuelled by media speculation, rather than any genuine economic fundamental.  The drying up of cheap credit has all but turned the car industry on its head, but this is not balanced by fewer people wanting to own cars.  I think most people would agree that demand for cars will increase over the foreseeable future and this latest crisis will be seen as a shakeout of the poorest performing manufacturers.  The markets are nothing if not forward looking and the latest rise in oil prices would seem to suggest that traders are still looking to an upturn in the world economy. 

It may take a year or two to shake the over supply out of the Spanish housing market, but when the snap-back comes, it will be stronger than most imagined and will take ordinary people by surprise.  Property prices will rise, and quickly, but you may need to hang on to that newly acquired investment a little longer.

Of course there are many things that could de-rail the whole process, such as a war or  a pandemic. However, right now my personal view is that there has never been a better time to buy.  There, I said it, but hopefully you will now be able to follow the logic, even if you do not agree with the conclusion.  Remember the old traders' saying " He who risks nothing, risks everything." A new property in Spain should be part of a sensible risk management strategy, as well as a lifestyle move.

Al Morton (former derivatives trader)

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