Lesson from Spain

June 7, 2012
Singapore Democrats

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Toh Beng Chye

The Eurozone debt crisis which begin in 2010 is now back in the headlines again with Spain in the focus. The news has been on the government’s recapitalization of it’s third largest bank, Bankia.

However, Spain’s problem is much more serious and profound than just bailing out a bankrupt bank. Their difficulties include soaring unemployment, a hefty budget deficit, and a plummeting retail sector.

These are some of the sobering statistics:

  • The unemployment rate runs at 24.3% (with youth unemployment more than 50%)

  • The economy contracted by 1.7% (as forecast by the Spanish deputy prime minister)

  • The budget deficit registers at 5.8%

  • Retail sales plummeted by 9.8% year on year for May.

The list goes on but the above numbers give us an idea of the economic pain Spaniards are going through.$CUT$

But how did Spain, the winner of the 2010 World’s Cup, end up in this position? Experts will point to many reasons but most will agree that the most important one is their property crash. Spain had a huge property bubble from 2000 which burst with the Great Financial Crisis in 2008.

How big was their bubble? During the bubble years, Spain built one new home for every new person added to their population, resulting in 1.7 persons for every home. Households have an enormous 80% of their wealth in real estate, and 24% own a second home.

Spain is not unique. Many countries had enormous property bubbles which burst causing many years of hardship for their populations. Famous examples are the Japanese going through their ‘lost decades’ after their asset bubble (1986 to 1991) burst and the US property bubble which led to the subprime crisis and the Great Financial Crisis.

This brings us to Singapore. Do we have a property bubble here as well? The Property Price Index shows a steep rise since 2005, more than doubling in 2007. In 2008/9, there was a sharp correction in the property price as a result of the 2008 Financial Crisis. It picked up again in 2009 and has reached the heights seen before the crisis.

I believe Singapore’s property started appreciating since mid-2009 due mostly to the following reasons:

  • “Hot money” flowing into Singapore as a result of the massive liquidity by the central banks around the world,

  • Influx of foreigners (seeking jobs/stability),

  • Rebound of our economy from the recession of 2008/9.

These factors have adverse effects on our property market. It is often difficult to tell a bubble when you are in one and it is after the crash that every thing becomes clear. Hopefully, we do not have to live through one to learn.

Dr Toh Beng Chye is a member of the SDP’s Healthcare Advisory Panel.