Are Spanish property price falls good news?

The Eurozone crisis may have stabilised, but it's still all doom and gloom for the Spanish property market if the latest reports are to be believed.

Last year's average price fall of around 10% will be followed by five more years of declines and further falls of 30% according to the reports.

The course of the Eurozone crisis took in 2012, with Spain firmly in the spotlight for much of the year, is behind the latest volley of depressing statistics for Spanish homeowners.  It is not just that austerity measures were ramped up, joblessness jumped and capital flight accelerated during the year.

Specific developments in the Spanish banking sector have driven the property market at least as much as these general negative factors.  Although Spain's outrageously oversized property bubble burst in 2008 the banks had not been forced to take the full hit until last year.

For several years the banks were allowed to either forebear from repossessing properties or, when they did take possession, were able to hold the foreclosed assets on their balance sheets at inflated values (e.g. cost or amount of mortgage).  This way they didn't crystalise their losses and have to raise more capital or, in the worst cases, go out of business.

From the point of view of the property market this meant that headline prices only declined gently for the first few years of the market.  Things became frozen - no one moved, no one slashed their prices and the market was not allowed to find its bottom.  Similarly the government did everything it could to sustain the unsustainable in the wider economy though it shouldn't have (Stimulus doesn't work - just look at Spain).

The bank stress tests and subsequent recapitalisation changed all that forcing the major lenders to recognise their potential losses and sell off assets.

So at least now the grand clear out can begin.  Bargain hunters and overseas investment funds will appear and some activity will return albeit at much lower price levels.  After a couple of years of pain we may at least be able to say we are nearer the end than the beginning.

The UK is still stuck in denial.

From our website:  Spain tax form 210

And winner of the worst government policy of the year is . . .

There have been plenty of contenders for the year’s worst (UK) government policy.  The coalition seems to have inherited Labour’s desire to meddle, fiddle and tweak and the uneasy marriage of Lib Dem lefties and nominally right wing Tories has been a recipe for fudge and confusion. 

This has led to a bumper crop of terrible policies including:

-          George Osborne’s “tax cuts for employment rights” policy was designed to please right wingers but was just another politician’s wheeze which backfired at the taxpayer’s expense (and confirmed that George’s scary similarity with Gordon – see “Oh No it’s Geor-don!”);

-          Ed Davey’s horrible energy bill which slaps an extra £100 onto fuel bills for a hotchpotch of measures which will damage the UK economy but do nothing to “combat climate change”.  In a world where India and China are building new coal-fired stations every week, the UK messing around with wind farms and subsidising loft insulation is an expensive irrelevance.  Davey’s bald-faced assertion that his measures will eventually reduce bills by £94 (compared to what they would have been without the bill) was political lie of the year ;

-          Separately the £2bn “climate aid” pledge to assist with climate change projects in the developing world had massive-waste-of-money written all over it;

-          The way the Treasury rowed back on the child benefit cuts for rich people was also depressing.   The original cut, announced last year, was the right thing to do but was badly botched from the start, penalising single-wage households.  The efforts to undo the damage have watered down the savings and added another huge layer of complexity to the tax system (see this if you don’t believe me see Couples face “who buys toys” quiz by taxman to get a flavour of the madness);

-          Kicking Heathrow airport expansion into the long grass (yet again) while simultaneously making UK air passenger tax the highest in the world, was a great example of political expediency trumping the long term economic interest of the country; and

-          Getting control over Labour’s crazy “open door / open wallets” immigration policy is important but the coalition have set an arbitrary target of limiting non-EU immigration and Theresa May is trying to reach it by clamping down on students from abroad and skilled workers business needs.  Leaving the EU and restricting welfare payments to citizens who have earned it would be a better bet (see EU’s migrant rules prove the referendum case).

So what could be worse than this lot?  Well my nomination as worst government policy of the year is Minimum Alcohol Pricing.  It’s at the White Paper stage now so not law but it will be soon, particularly given that the PM has thrown his weight behind it (so we can’t blame the Lib Dems for this one).  It may not be the policy with the most serious bad consequences but it is truly awful for lots of reasons which I describe here:  Minimum alcohol price: Cameron’s dodgy dossier

From our website:  Do you need to submit a Spanish tax return?

Minimum alcohol price: Cameron’s dodgy dossier

My respect for the British government sunk to a new low with their recent proposal to set a minimum price for alcohol of 45p.  This would raise the cost of a normal strength can of beer to £1.12 and add around 70p and £2 to bottles of non-premium wine and spirits respectively.  Many cut-price drinks offers would effectively be made illegal.

The move is justified on health grounds. In the words of David Cameron, who is personally championing this  assault on the rights and pockets of consumers, “it is aboutpeople pre-loading on very, very cheap, heavily discounted drink from some supermarkets.”   We are told that research has shown that a 45p per unit minimum would save 2,000 lives and 66,000 hospital admissions over 10 years as well as reducing overall consumption of alcohol by 4.3% .´

These alleged benefits have been so often repeated in the media you would think they are cast iron certainties.  But they are based on some very dubious research which has been completely discredited by an Adam Smith Institute report on the subject (The Minimal Evidence for Minimum Pricing).  I will return to this “research” later, but I recommend anyone who cares about honesty in public life to read it in full.  It is a breath-taking example of government and lobbyists softening up the public with some dodgy headline-grabbing statistics.

It is hard to know where to begin with how vehemently I oppose this proposal and how angry it has made me.  Here is a list of some of the ways I believe it is completely unjust and uncalled for (some of the arguments are lifted right out of the Adam Smith report):

• It is totally unfair to punish almost the whole country (except teetotallers) by forcing them to pay an estimated £700m extra  a year to retailers and the drinks companies just to tackle a minority problem.  How many people do you know who “pre-load” on cheap booze before going out?  Obviously some do but we must be talking a low single digit % of the country.

• Whatever this “research” says, it is very unlikely that heavy drinkers and pre-loaders will be deterred by these policies.  I know a few boozers (and used to be one in my younger, wilder days) and they are the last people to be put off by a price hike.  It is the moderate drinkers who have other priorities besides getting hammered who will cut back.

•  Is a policy to reduce drinking really needed?  Alcohol consumption has been falling steadily in recent years any way, in fact by many times greater than the 4.3% fall claimed in the propaganda, sorry research, that accompanied the proposal.

•  Even if we drink less because of the minimum will all the health benefits be positive?  Teetotallers die earlier than drinkers on average.  Home brewing and distilling will no doubt rise and may bring some unpleasant side-effects.

• By everyone having to pay more money for less product the economy will suffer in at least two ways – a loss of jobs in the drinks and retail industries and a draining of demand from the rest of the economy as it is redirected to pay higher drinks prices.

•  The government already hammers drinkers.  Between duty and VAT, half the price of a £5 bottle of wine goes to the state.  The so-called beer escalator has been one reason why so many pubs have closed their doors.  This policy will punish drinker and the economy again but this time without any of the additional costs flowing through to the government.

• It is a highly regressive measure.  The poor and modest-earners will be hit much harder than the rich who don’t buy cheap brands and, even if they did, would not notice the increase as  a proportion of their salary.  It’s easy to imagine children going  hungry in some households because their boozing parents have been forced to pay more for their fix.

• Most government busy-bodying and interference produces unforeseen and undesirable consequences.  Minimum alcohol pricing could for example easily lead to more crime – such as shoplifting and smuggling.  There may be other nasty knock-on effects from the increased poverty caused by this regressive measure such as child malnutrition.

But lots of lives will be saved right?  That’s where the The Minimal Evidence for Minimum Pricing report into the so-called research is so useful.  The evidence for the 2,000 saved lives is extremely scant and, in fact, a closer examination of the facts would suggest that this “trump card” is bogus in the extreme.    Here are a couple of snippets:

-          To support the idea that minimum pricing will reduce alcohol consumption by 4% and this will lead to many health benefits, a key assumption is that heavy drinkers will cut back more than moderate drinkers.  This is not supported by any analysis and actually flies in the face of what we all know to be true – the last people to cut down on their habits (like smoking) are the addicts.

-          The alcohol consumption data in the researchers’ model comes from 2006.  Since alcohol consumption has declined by at least 15% since then, these claims of 4% falls are ridiculous.  It’s already happened many times over.

-          The model also assumes that each % point fall in average consumption produces proportionate health benefits (reduced hospital visits, deaths etc).  In fact the NHS has recorded no such improvement in these figures since 2006 .  The clear implication is that falling consumption is due to the moderate drinkers cutting back (due to high taxes and recession perhaps) while the hardcore carry on regardless.

Please read the report.  You will never listen to any politician, lobbyist or reporter who quotes this kind of research in future without thinking back to it.

Spanish Wealth Tax Guide

How to be happier: three books, one answer

For those of you with short attention spans and don't want to read the whole piece, here's the best advice I have read about happiness:

Join a group

I have read a few books loosely covering a similar theme: human psychology and all offer very similar conclusions about the secret of happiness or at least one large part of it: regular social interaction with people you like:

The Social Animal by David Brooks

NT Times columnist's survey of scientific advances in the understanding of the brain and how it connects with our success and well-being.  He writes:

"According to research . . . the daily activities most associated with happiness are all social - having sex, socialising after work and having dinner with friends."  He also quotes research that estimated the increase in psychic well-being (happiness) from regularly meeting up with a club or society is equivalent to that of a  $65,000 salary increase.

The Chimp Paradox by Dr Steve Peters

Self-help book by the psychiatrist who many sports stars credit with helping them to win (it's a great book - see my post How Many Mental Problems Do You Have?).

Dr Peters doesn't specifically identify regular social interaction as the number 1 route to happiness but he has a lot to say about "troops", his description of the close circle of friends and family that we rely on throughout our life (like chimpanzees who live in troops).

For our evolutionary antecedents, failure to get on in the troop meant certain death so it's for this reason that chimps are observed spending 30% of their time socialising, primarily grooming each other.  If we don't satisfy this urge to socialise, writes Peters, we are denying our inner chimp a fundamental requirement for a happy life.

Thinking Fast and Slow by Daniel Kahneman

Nobel prize winner's distillation of a lifetime researching human thought and behaviour.  He says the best way to be happy is "to spend more time doing things we want to do with people we like to be with".  He writes about the research done into the effect of increases in material wealth - even winning millions on the lottery only boosts happiness for about a year he reckons.

My experience - I play football once a week (badly) with guys I have known for years and we dissect the game in the pub afterwards, mainly by taking the mick out of each other for mistakes we have made.  On reflection I suppose this is the kind of thing the experts have in mind and I think they are right: it does make me a lot happier.

Maybe I should take up something else but it would have to meet those three criteria: be enjoyable, be with people whose company I enjoy and be regular.  Suggestions on a postcard.

From our website:  UK and Spanish tax implications of a property in Spain

Spanish tourism feels the heat

It's Spain's number one industry and main source of unemployment so it is merciful that tourism has held up well during the crisis.  But is Spanish tourism about to go into reverse?

Probably not, despite a fall in tourist numbers announced recently by researchers FRONTUR.  Overall tourist numbers were down 3.2% in October when compared to last year.

But October is not a key month for the industry and the same survey recorded an increase overall for the first 10 months of the year (total numbers up a healthy 3.1%).

Spain is a tourism superpower with only France attracting appreciably more visitors from overseas every year.  Spain gets twice as many visitors annually when compared to the UK for example.   This is unlikely to change rapidly - Spain has the infrastructure, the regulars (like those that visit their holiday homes or relatives) and a solid brand based on decades of delivering relatively cheap "sun and sand" holidays for families.

But on the flipside Spin needs tourism more so any signs of weakness are a big worry.  Delving into the recent report does suggest a few causes for concern.

There are some big regional variations with some regions, like Catalunya and the islands, doing well but others such as Andalucia (down 7%) struggling.

 Andalucia and its Costa del Sol is an area I know well and I have been a frequent visitor to its hotels and resorts.  It is a big generalisation but I think it represents a weak link in Spanish tourism.  There are a lot of very average hotels and beaches and the Costa del Sol seems to be relying on basic packages and low prices to attract families and those on a budget.  There is not a whole lot to appeal to the choosier, better off segments of the market.



And then there is the question of where all these tourists come from.  Here too the chart suggests a cause for concern:

The UK accounts for fully a quarter of all Spain's overseas visitors, easily the biggest market.  The Brit numbers are down on the month and stagnant for the year.

Maybe that's because of a lack of disposable income in Britain, or perhaps down to the higher flight prices and taxes.  The worry is that Spain has become a bit unfashionable in Britain given all of the alternatives available in more glamorous and interesting settings.

Whatever the cause it is clear that Spain needs to work at maintaining, never mind growing, its tourist base.  The cheap and cheerful sun and sand holidays won't do it.  Marketing more heavily outside of Europe and going upmarket might.  And that is exactly what the tourist ministry is pushing for.


From our website What to do if you get a letter from the Spanish tax office

Mendes is the latest British hero to light up 2012

It's a bit premature for annual reflection but I already know my abiding memory of this year will be: the union jack.

In Britain 2012 was the year when every business and organisation decided that flag-based marketing was the way to go.   Is there any product or service that has not been flogged by wrapping it up in a union jack?

The reason is pretty obvious.  An outpouring of patriotism and national pride as a result of the Diamond Jubilee, running a successful Olympics and numerous sporting successes.

The British Sports Personality of the Year has been a hotly discussed topic for months because the competition is so intense: Wiggins, Murray, McIlroy et al.  Lord Coe and Dave Brailsford are being hailed as visionary heroes.

The new Bond film, Skyfall, has kept the feelgood factor going a bit longer.  I enjoyed the film enormously despite not being a Bond fan.

It's a rare critical and popular smash which triumphantly brings the legend back in front of a worldwide audience just weeks after the inspired Olympics opening ceremony stunt with the Queen.

Not only does the film reflect the usual Bond traits of insouciance in a crisis, cool charm and dry humour that we like to think of as typical of the British at their best, it is also set mainly in Britain (London and Scotland). The stars are also a reminder of another thing we have to be proud of: great actors. Besides Craig, Judi Dench and Ralph Fiennes are very good.

The theme song is no classic - more a homage to the 60s classics that made Bond music as much loved as the films.  But it is good and is another reminder of a British success story: Adele is comfortably the world's most successful music artist of the year as she was in 2011.

I also defy anyone to not feel a stirring of emotion when the iconic Aston Martin makes an appearance even though it does stretch plot credulity somewhat (how old was Bond when he got it?).

The success was not inevitable.  Bond films have fallen flat before, as recently as 2008's Quantum of Solace.  It's not easy to make a film that works with the grain of the Bond legend, includes all the trademark elements and also makes for a satisfying, coherent and modern film in its own right.

That Skyfall does that and more is a credit to the director Sam Mendes. I shall be looking for him in the end of year Person of the Year lists.



From our website: Spanish tax service for individuals

Stimulus doesn't work. Just look at Spain

As the stimulus versus austerity debate rolls tiresomely on, it is a good time to reflect on what government action did for Spain's economy after the crisis hit four years ago.

Spanish unemployment hit 25% recently.  The government is bankrupt, the banking system bust and the economy is shrinking.  Only an ECB promise "to do all it takes" is preventing a slide toward default and chaos.

As with most Western countries the proximate cause of the crisis is the debt-fueled bubble that preceded it, with the property market at its core and low Euro interest rates enormously exacerbating the problem.

Unlike Brown's Britain, Spain did not compound the problem by running  a large government deficit during the boom years.  The Spanish government was running a surplus in 2007 and the public debt to GDP ratio was a respectable 36% so, according to Keynesian logic, the government was well-placed to rescue the economy from the effects of private sector deleveraging.

And the government has tried lots of stimulus in response to the crisis.  Between 2008 and 2010, before the austerity drive started, the government spent like a drunken sailor: national debt ballooned by more than €200 billion in two years (20% of GDP).

Super low interest rates sent mortgage costs tumbling and thus artificially boosted private incomes.  The government passed laws to allow people to defer their mortgage loans and escape foreclosures.  There were huge public works programmes and schemes to boost car sales (see Spanish car sale worst for 15 years).

If stimulus worked as expected these measures should have allowed the private sector to recover and allow the government to start withdrawing support and begin rebuilding its own finances.

But we are as far away as ever from a private sector recovery.  All those stimulus measures worked for a while but just postponed the day of reckoning.   Spain got no lasting momentum from those so-called boosts - they are just left with the debt.

Car sales are a perfect example of the futility of government action and the damage it can do in the name of stimulus.

Before the crisis hit Spanish car sales regularly topped 1m vehicles a year.  When the bubble burst predictably car sales crashed too, falling 18% in 2009.  The government responded with Plan RenoveE - a subsidy dressed up as a green initiative - and this programme did support increased sales while it ran.

But what good did it do?  Sales last month were 35,000, the lowest on record.  Year on year sales are down an incredible 37%.  The government is trying to revive the subsidy scheme even though it can ill-afford to and must know though that the only permanent effect will be to increase the national debt.

This is just one example.  The public work schemes helped some workers to stay in a job for a year or so but, now the money has run out and the government is cutting at all levels and raising taxes, the unemployment picture is worse than ever with no end in sight.

Arguably worst of all was the various policies to prop up the housing market.  Banks hid their losses for four years until the Bankia scandal showed just how close the whole system was to collapse (see Are Spanish bank accounts safe?).

Only then did the banks face up to their bad debts, begin liquidating and seeking new capital.  A few households might have escaped foreclosure for a time but the full force of "deleveraging" is now being felt and will be more severe than it would have been with an immediate clear out after the property boom ended.

Imagine if the Spanish government had adopted a different path in 2008: concentrated on economic reform instead of increasing public spending, cut out public sector waste, forced the banks to deal realistically with their bad debts and forsworn any quick fixes to help individual sectors.

Yes the immediate effects would have been drastic - a deeper recession, more foreclosures and probably worse public sector finances for a while.  But that was four years ago.  By now things would have bottomed out and there would be growth on the horizon instead of endless stagnation and self-defeating austerity.

Keynesians will read this and say it is the Euro that's done for Spain and it is unfair to blame government attempts to stimulate its way out of recession.  They are mostly wrong.

It is true that Eurozone membership has been a disaster for Spain but the damage was done by low interest rates during the boom not since (see Eurodoubters are being proved doubly right).  Since 2008 rates have mostly been set low to bail out Spanish debtors.  Spain does have an overvalued currency which is part of the problem but Spanish exports have actually been doing well, even now growing at double digit pace.  It is the efforts to end the recession with stimulus that have done the most damage.

When you see an American or British commentator trying to sell the benefits of government action to "fight" a weak economy, remember what has been done to Spain in the name of stimulus and reject them.




From our website: Changes to Spanish Tax Form 210