For almost a decade, the Spanish population was subjected to, by land, sea and air, an avalanche of messages that reinforced one idea: if you are not a property owner, you are nobody. In every place and at all times one heard over and over again the same song: that the housing bubble didn't exist, that the prices of houses would never go down, that the purchase of a house was the best option for retirement, that for the price of renting you could be a property owner and that, when comparing prices, it was better to buy. More than opinions, they were indisputable sentences that were dropped into any type of situation or conversation. Phrases that moved from mouth to mouth and managed to integrate themselves in the common sentiment of people.
But where did these legends come from? Who spread these myths?
Messages that were repeated in the mouths of pundits who frequented television satellite dishes and monopolized radio space. Messages that were amplified thanks to the media who entered into the kitchens of every home.
From the denial of the bubble to the soft landing
Many will remember how Enrique Lacalle, the former deputy of the Partido Popular and president of the most important real-estate fair in Spain, or of José Manuel Galindo, president of the Promoters and Builders Association of Spain, preached to the point of exhaustion that the housing prices would never go down. Others will recall Enric Reina, president of the Association of Promotors of Cataluña, deny, almost to the point of absurdity, the existence of the housing bubble (even when it had already burst) and to tirelessly defend that to buy a house was a secure investment and that to rent one was thowing away money... These personalities frequently participated in debates and televised interviews under the label of real-estate experts. In this way, they presented themselves to the public opinion as real-estate experts and not commercial agents that were trying to position their products. More than interviews, their appearances were more like publicity cradles and spaces for free advertising.
Definitely, the role of the mainstream media during the years of the housing bubble, of being amplifiers of specific messages, was reprehensible. The critical voices of those economists who warned of the unsustainability of the model were marginalized, drowned out and forgotten. Their presence in the media was anecdotal and thus deprived the population of hearing anything apart from the dominant discourse.
If these testimonies, coming from the mouths of representatives within the private sector, were ethically questionable, the same declarations being done by elected officials are now (ya son de juzgado de guardia). For reasons of space, we will focus on the messages that were released from the Ministry of Housing. A ministry that was established during Zapatero's first term with the mandate, to guarantee the right to housing as was outlined in Article 47 of the Spanish Constitution. It soon became evident, however, that the Ministry was only acting as a transmitter of interests within the business sector.
An interview illustrates the mindset of the Ministry, conducted by the BBC with Carme Chacón when she was still Minister of Housing. At one point in the interview, the reporters questioned the excessive weight of the real estate sector in the Spanish economy and hinted at the possibility of a brewing housing bubble. Puzzled, Chacón flatly denied this with a shake of her head as the interview came to a close. Although this interview was not published in any media sources throughout the country, the video clip became a viral phenomenon on the net. And so, during the golden age of the Spanish economy, talking about the housing bubble became taboo.
Another minister who will also not pass into the annals of history for her work within the ministry nor for her defending of the right to housing was Beatriz Corredor. Property Registrar before the Socialist government's first appointed Minister of Housing and afterwards Secretary of Housing (once the Ministry was annihilated), during the entire legislature she didn't stop repeating the same sentence: "Now is the right time to buy". First by claiming that interest rates were at historic lows and therefore was a unique occasion to buy. When the real-estate sector started to collapse, by assuring that the housing prices had already hit bottom and therefore was also good time to buy. And things don't stop there. In February, 2009, she vehemently denied that Spanish families were having problems paying their mortgage. Ironically, that same month the PAH was formed in Barcelona. On the other hand. Beatriz Corredor was one of the more fervent advocates of soft landing during the early stages of the crisis. A euphemism for not having to recognize that the bubble has burst and that, presumably, property prices would eventually fall. But time has shown otherwise and the harsh reality is just starting to catch on.
"This is a good time for anybody who wants to buy a house to live in or for a family that wants to change homes."
Beatriz Corredor, September, 2008
Regardless of whoever was heading the Housing portfolio, the reality was that this Ministry was more preoccupied with serving the interests of the private real estate sector than guaranteeing its citizens the right to dignified housing. They were more interested in sales within the housing sector than in evictions of families. They were more interested in inaugurating real estate fairs and exhibitions than trying to provide solutions to its citizens for paying rent or mortgage installments. It was so blatant who this Ministry was serving that many called it "the mystery of housing". Thus, despite the emergency situation at the onset of the crisis in which hundreds of thousands of families found themselves in extreme need, it is no wonder that, with the bursting of the bubble and subsequent collapse of hundreds of companies within the real estate sector, the government decided to remove the Ministry. If the majority of companies within the housing sector had disappeared, their reason for existing had as well. With property assets now in the hands of financial entities, the Ministry of Finance became responsible from that time on of ensuring the real estate interests of banks.
Through all this, the few voices who dared to contradict this hegemonic thesis, which had been erected as a universal truth, were either neglected, ignored or even branded as being unpatriotic. Not even the reports coming from the Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), which in 2004 stated that the housing market was being overvalued at between 30 and 40%, nor the numerous articles being published in The Economist warning of the Spanish housing bubble risk were enough to dampen the collective euphoria that we had installed in ourselves. Society seemed alienated, abducted and trapped in a kind of loop. A mortgage had been transformed into a status symbol, a euphemism for professional success which signified the passage into adulthood. Rent, however, was a symptom of failure and inferiority. The message had gotten through: whoever didn't buy a house was stupid, and whoever was still renting, a poor wretch.
The formation of prices
In explaining the real estate bubble, politicians and experts resorted to all sorts of myths and fallacies. Half-truths that explained only part of the price formation process while other determining factors were ignored.
Often the exorbitant price growth was attributed to the "inexorable" law of the market. According to the basic law of economics, when the demand for a good is higher than its availability, the price rises.
Undoubtedly, people's tendency to acquire housing within a regime of property ownership helped feed demand within the real estate sector. The continued rise in housing prices generated expectations for the revaluation of property values. In a society educated in the culture of ownership, the perception of continuously rising housing prices and that tomorrow's apartments would be more expensive encouraged people to buy. Along the same line, one of the arguments that made the most fortune, attributed the rising prices to the pressure of a growing population caused by the surge of new arrivals and demand created by the emergence of new family units, such as single parent households.
Viviendas empezadas y variación neta del número de hogares. 1992-1996. Totales anuales.
GRAPH HERE
Nonetheless, statistics indicate that during the housing bubble, more houses were being constructed than were necessary in order to accommodate the increase in population. The growth in supply was systematically higher than what was required in order to satisfy the demand for new homes. Between 1997-2007, 390,000 new homes were built annually. In that same period 6,6 million houses were built, which means that new housing projects in this period exceeded almost 60% of the net creation of new homes.
HOW DID WE GET HERE: THE DNA OF THE HOUSING BUBBLE
In a country with the highest ratio of housing per capita within the entire European Union and with more than 20% of empty apartments, the rising housing costs could not simply be explained by the scarcity of goods. In fact, if there is anything leftover in our country, it is housing.
For years we had to also hear that it was the elevated land prices that were causing the increased cost of housing. But it was actually the reverse. It was the anticipated housing prices that determined the land costs. Land prices only affects the distribution of surplus land value between the seller and the housing developer. (El precio del suelo solo afecta al reparto de la plusvalía entre el vendedor del suelo y el promotor final de la vivienda.)
To be certain, however, the result is that it becomes impossible to understand the continuous rise in housing prices that took place over a decade, from 1997 to 2007, with an increase of almost 200% without taking into account the phenomenon of speculation. In this regard, the 2001 Dot.com crash, marked a before and after in property inflation. The stock market crash intensified the flow of capital into real estate. In this way, land and housing became a haven and storage for capital fleeing from technology shares. To give us an idea of the scale and the scope of the phenomenon: according to a study by Aguirre & Newman, during the peak years of the boom, speculative demand accounted for 40% the total demand and revaluation of housing was in the order of 800%. Despite this, during the housing bubble, anyone who had pointed out speculation as being a determining factor in escalating housing prices would have been called anti-systemic.
Features of the real estate market:
The myth of the perfect market
We had to hear that one could not regulate the real estate market because to intervene in the market would mean to distort it and create inefficiencies. And that by explaining the behaviors of supply and demand, politicians and experts assumed that the housing market was a perfectly competitive one. But unlike what some would like us to believe, housing is neither an asset nor does the real estate market as it should. Therefore the laws governing the perfect competitive model do not apply.
Using the jargon of economists, we could say that housing is a good with an unyielding demand. This means that the demand for this good, by the fact that it is also a necessity, is less sensitive to the fluctuating prices and therefore stays relatively stable. The opposite would be if these goods were considered expendible products. These types of goods in which the demand is more elastic would be more sensitive to price fluctuations. In this regard, if the price suddenly rose to a disproportionate amount, then people would stop buying immediately.
On the other hand, markets of perfect competition presuppose the existence of a limited number of buyers and sellers, in such a way that none of the them, acting independently, can influence the set price. The reality of the real estate market, however, turns out to be something else. It operates more like an imperfect market with few producers and many consumers, something which economists call an oligopoly. Within this kind of market, the producers occupy a strong position which they then use to fix prices which are not determined by the mutual interaction of market forces.
Another of the assumptions necessary for the market to function correctly assumes that all individuals interacting within the system have the same information, that the market is transparent and all decision making is rational. However, the real estate market has been characterized by its opacity and non-synchronous information between different economic agents operating within it. This means that it produces negative external factors and that the market fails to allocate resources in an efficient manner.
In any case, any first-year economics student knows that the role of the State is to try to correct these mistakes in order to achieve the maximum perfect competition. However the government, rather than correcting these deficiencies, dedicated themselves to feeding myths, such as those who claimed that housing prices would never go down and also to implement policies that only amplified the pathological nature of the market and benefited only specific interests.
A society of small or big property owners?
The ownership of empty homes
As has already been noted, one of the anomalies of the spanish housing market is the huge amount of empty homes that exist. Despite the lack of official figures (the INE is expected to make a new census public by late 2012), if we add all the houses left empty for purposes of speculation, new stock left unsold because of the crisis as well as evicted homes resulting from foreclosures, then we find an incredible surplus from different sources of somewhere around 6 million homes.
It is within this context that in September, 2011, in full crisis, the central government approved a measure that streamlined the eviction process for non-payment of rent. A measure that left the most vulnerable people homeless, through no fault of their own, having been unemployed and without income to cover even the most basic needs. One of the arguments used by the Administration, in order to defend a measure of this scale in the middle of a crisis like we were living in, was that this would provide a rapid and guaranteed procedure for owners of properties, reducing the fear of renting apartments, which was the reason that they were being left empty. Another one of the myths that were being circulated during those times was that property owners didn't want to rent out their apartments due to the difficulty of evicting tenants who either were not paying their rent or destroying property. It's as if all renters were vandals and potential defaultors. On the contrary, official statistics tell us that, until the onset of the crisis, the default rates for renters were less than 2%, one of the lowest rates in the world.
Still, according to polls on the street, this speeding up of evictions received widespread popular support. Why is this?
During the real estate bubble, one of the messages that most penetrated into the popular imagination was the one which assured that Spanish property holdings were very distributed. While it is true that a majority of people had acquired housing within the regime of property ownership, to say that property holdings where in the hands of many was a fallacy that even the Administration helped perpetuate. Whenever the Administration dealt with the empty homes debate, they always gave the example of the grandmother who didn't want to rent out to anybody for fear of "vandalizing renters" who would destroy everything. Using these examples gave everybody the impression that the owners of these empty apartments could be anyone of us. An uncle, grandmother, parents ... normal people and everyday joes that had inherited an apartment and didn't know what to do with it. However according to a financial survey of households carried out by the Bank of Spain, less than 20% of the population own a real estate asset apart from a primary residence. Given that within the category of active real estate are assets like a parking lot, in reality there is a heavy concentration of property in our country that is in the hands of a few. Therefore, contary to popular perception, most apartments that are left empty are not owned by grandmothers, uncles or fathers, but by large property owners. Is it not a coincidence that they started streamling the eviction process now that financial entities have become the main real estate companies in the country?
Perpetuating the misconception between small and large property owners has been a perverse strategy that has given back many returns to the Administration. Once society accepted the validity of this premise, the Administration could put forward legislation in favour of large property holders without raising any suspicions, and even sell these measures as being beneficial towards the population.
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