Housing roils Spain's economy as Zapatero starts second term

Newly reelected Spanish Prime Minister José Luis Rodríguez Zapatero used his lengthy investiture debate this week to lay out plans to ease what he called Spain's economic slowdown. But with the country's fortunes riding disproportionately on the hard-hit real estate industry, many experts see something worse than a slowdown at hand.

"This talk of a 'slowdown' makes me laugh," says Mikel Echavarren, CEO of Irea, a Madrid-based real estate consulting firm. "First, they talked about a 'soft landing.' Then it was a 'slowdown.' Those are deceptive terms. We are in a serious crisis."

Like other European Union countries, Spain has seen unemployment rates increase and food and other prices rise precipitously in the past year. Yet because the housing industry accounts for more than 9 percent of the country's gross domestic product – more than double that of many other economically advanced nations – the crisis is hitting Spain in particularly painful ways.

On Wednesday, the International Monetary Fund predicted that Spain would experience the greatest drop in annual economic growth among developed nations this year, falling from 3.8 percent to 1.8 percent. The IMF currently estimates a 4 percent inflation rate, one of the highest in the eurozone, and unemployment has jumped to 9.5 percent from 8.3 percent.

"Spain will be affected both by the housing correction and by the financial tensions," said Charles Collyns, the IMF's deputy director of research, at a press conference on Wednesday. "So, we do see a period of slower growth."

During the run-up to the March national elections, Zapatero was careful to place the Spanish downturn within the context of the global financial crisis. But analysts here see peculiarly Spanish elements to blame, namely, widespread real estate speculation that led to wildly inflated housing prices. "The credit crunch is worldwide, but it isn't like a meteorite that hits and does away with the dinosaurs," says Echavarren. "If we had had a healthy economy in the first place, we would be able to withstand it better."

With interest rates climbing and credit harder to come by, however, Spaniards are buying fewer homes, and more homeowners are defaulting on loans.

The repercussions are being felt throughout the industry. In 2007, 32,000 real estate agencies – 40 percent of the country's total – closed their doors. Brickmaking and other construction-supply companies are cutting back on workers. And many developers have simply abandoned half-finished apartment buildings, leaving the buyers who have paid for new housing wondering if they'll ever be able to take possession.

The descent is all the more painful coming after years of unprecedented growth that transformed the once-backward Spanish economy into the eighth-largest in the world.

Even today, Spain's treasury retains a surplus. That cushion has let Zapatero adopt several emergency measures intended to soften the blow, such as issuing €400 tax rebates, creating jobs for unemployed construction workers, and lengthening mortgage terms.

But those efforts will have only a negligible effect, says Antonio Argandoña, professor of economics at the Barcelona campus of the IESE Business School. "The tax rebate is a temporary aid; it will only help for one trimester. And extending mortgage terms may help families who already have loans, but it's going to impede access to new credit, since the banks aren't going to be as interested."

The problem lies not so much with the measures themselves but with the nature of the crisis. "There's very little any government can do," says Mr. Argandoña. "They can create more public works, but that takes time. Governments just don't have the tools to stop this kind of decline."

Indeed, it is likely that the worst is still to come. While the IMF sees the first signs of relief coming in the last trimester of 2009, Echavarren is even more cautious, saying that "2009 is the year the bad news spreads to other industries. We're not going to touch bottom until 2010."

That will be halfway through the term that Zapatero will begin on Friday, once Spain's congress confirms his reelection.