Tuesday, May 26, 2009
Real Estate in Europe
I am following the Spanish real estate market for months now. Today I found an interesting chart comparing real estate prices from several European countries and the US. The chart shows the year on the x-axis, the average home price in € on the y-axis. All prices are CPI adjusted. It is difficult to understand why real estate is more expensive in Spain than in Germany or Austria where salaries are higher. Still, after the UK, Spain has the highest home prices. The article published by Citigroup expects a 5 to 6 year downturn of home prices totaling a 25% fall in countries like UK and Spain where there has been a significant boom in the last decade(s).
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Here is an example: there are 2 farmers, farmer A and farmer B. Farmer A sells a pig to farmer B for 100 euros. After a month farmer B sells the pig back to farmer A for 130 euros. The next month, farmer A sells the pig back, again making a 30% profit. This continues for the entire year, each month the pig being sold for a 30% profit. At the end of the year, one of the farmers sells the pig to a business man who is passing through. The other farmer, very disapointed and angry tells him:
ReplyDelete"What did you sell him the pig for? We were becoming rich selling the pig to each other."
The story sounds silly because no more goods or services were being produced (unless the pig was getting fatter), so the farmers could not be getting richer. Yet if you replace the pig by stocks or real estate, it seems like that has been the basis of much of the wealth generated over the last 10 years.
Hard to know what will happen next.