Plotting to invest your savings in Spain ? Worried about the collapse of Spanish banks, falling prices and the economic crisis in Europe taking its toll on Spain ? It would be strange if you were not. Investing in Spain at the moment needs to be done with your eyes wide open – but it isnt per definition a bad idea.
So, reports have stated that the Spanish banks and economy in general is about to crash and burn. Leaving the EURO is inevitable and decades of economical depression is ahead. Others argue the bottom has been reached, small signs of improvements can be found, the Spanish economy and banking sector is too big to fail and the upturn will be slow but start to happen relatively soon. If you are talking to estate agents inquiring about potential dream homes in Spain, non-surprisingly the latter story will be the one they tell you. But which one is correct?
The crash and burn theory is the natural outcome of certain external factors and as such a likely scenario to unfold in the future. However, what is required most likely is a Greek bankruptcy leading to massive losses in banks throughout Europe. A number of these banks will fold, thus further diminishing credit rating and trust in the market, which will make funding of debts – new and old – expensive or impossible. This has the potential to stimulate further problems for Portugal first and foremost, but secondly Italy and Spain as their burdens of interest will grow significantly through the upcoming re-funding of national debts. Further contributing factors could be economic skeletons in Spanish and Italian closets, the existence of which are probably more likely than not, however them being exposed goes against the interest of big players on the market and as such it may be avoided. The same goes for the massive amounts of mortgages and other types of loans not currently written off as lost by bank in Spain, Italy and elsewhere.
Should these loans be written off tomorrow the Spanish banking sector would most likely collapse as the solvency of a vast number of these look more artificial than real. Again, there is no interest in the market of exposing these postponed losses, to the contrary. These phenomenons could lead to a pressure from inside and out for countries like Spain to leave the euro, this would have further implications that are hard to predict, but certainly steeply rising interest rates is likely. Another scenario is a devaluation as a mean to better competitiveness and exports, which would probably help short term economic boosts but lead to inflation and further rising interest rates to combat such rises in inflation. From across the pond other economic dangers lurk, that could topple a vulnerable market like the Spanish one. Whichever way you look at it though, as a prediction of a possible future development – it could happen, it is even a likely outcome.
The hurry up and invest theory is equally true. The Greek government got their bailout and if the negotiations turn out well, the Greek economy may have been bought a couple of years before the inevitable collapse. If this holds true and no other European countries end up in economic turmoil within the foreseeable future, we may well have gotten the breathing space needed for the slow signs of bettering economic trends to be nurtured into full bloom. The interest rates are still low in historic terms, unemployment has been marginally falling in most of Europe, inflation has been on the rise but not drastically and mainly in less important areas. Time is essential even if recovery and growth is slow, as the banking sector is vulnerable and need time to spread the losses and rid themselves of dead weight, governmental reforms across Europe need time to work, market trust regrows slow. The wheels are turning slow but theres potentially light at the end of the tunnel – and though that could be a Greek train approaching – it could also be a new boom in the world economy. Again, the prediction could be correct – if all goes well, buying today would be at the bottom and in 2 years time the ROI would be excellent – it could happen, it is even a likely outcome.
Does it matter? Yes. Whilst planning is essential, especially when emigrating, very few people have the ability to create a solid plan that entails both scenarios, as it basically needs to span everything from blooming activity all around to endless chaos and depression. What is worse is that the plans will be affected massively by the outcome of the scenarios above. If you have made a solid plan to buy a house with plenty of money upfront and a small mortgage, researched your market as a skilled professional and found a perfectly suitable area you would seem to have most bases covered. Because. It will matter to your life and your business if 25% of your expat customers suddenly leave within a year. It will matter if the purchasing power of those left behind – Spanish and expat – is diminished drastically within a short period.
It will matter if everyone gets further cautious and keep their money stashed away. It will matter to you if your mortgage is suddenly twice as expensive due to steeply rising interest rates. It will matter if you suddenly need investment in your business and no bank is willing or able to provide it. A lot of more indirect consequences would be equally likely such as services being cut harshly due to tax revenue dropping, the general dynamics of a town at a standstill being rather depressing with buzzing squares turning into abandoned heavens for whitewashed windows, a growing unemployment rate would be likely to lead to increased social problems and subsequently the idyllic town you bought your house in might suddenly be plagued by yet unseen waves of crime. Now of course, the exact opposite of all these doomsday theories and predictions could be equally true, and that is exactly why it matters.
The circumstances you move to may change but indeed so may your personal life and preferences. It is an obvious truth that if you plan to stay indefinitely in the loving relationship you’re in and the plans you made for your job and pension turn out adequate, then of course a 30% drop in price over a limited timespan matter little or not at all. However, the honeymoon is rarely spent plotting the divorce, its uncommon to debate the terms of your departure at the job interview and you can barely predict what scandals the politicians might get involved in today, much less predict what changes they may enforce on your pension in 15years. Is that relevant? Yes! Make a plan and throw it away. Plans are nice guidelines but mainly useful for hindsight and giggling over all the things you simply hadn’t foreseen. If you’re forced to sell suddenly for whatever combination of reasons, you’re almost always in an extremely difficult situation if the equity is negative and almost inevitably will be if you bought within the last 5-8years and a 30% drop happened during that period.
Having a plan. Knowing what you can afford. Its an excellent start but the warranty only lasts till the next bill comes in and the next paycheck is cashed. The Americans cant predict the future and thus you cant plan for it.