Given the recent virtual collapse of the housing market in Madrid and Barcelona I can only comment that this bubble was 8 years in the making before it went pop! After all, what did anyone expect ? Already 8 years ago if you took the net rental income of a flat in Barcelona and divided it by the going purchase price it gave between 0,5% - 1,5% return on investment! My benchmark for a healthy minimum has always been 5% and ok, I could swallow 3% but this was ridiculous. The Economist was raving about this bubble for years and it kept on growing!

Clem's pearl: "If (Monthly rental x 10) / (purchase cost) < 5% then property is overvalued or something else is seriously F. up"

So now what !? Well for a start we now have banks in Spain that are collecting foreclosed property at an alarming pace and in order to rid themselves of the assets they are bundling 5 - 10 flats together and selling them off at a 50% discount to the rich and wealthy!

You might not pity the poor fellows who have lost their home but the problem does not stop there, on the contrary, the real hit will be felt by those who have paid their mortgages and effectively are in negative equity to the tune of 50% !!

No real acceptable way to change or sell the property until the real value slowly creeps up to the original purchase price. This could take 10 years or more, look at Germany or the UK where this has happened before but with relatively modest 15% negative equity! In practice it places a huge number of properties outside the resale market and effectively kills transactional liquidity.

At stake is the stagnation of a whole chunk of the economy as real estate sales (and constructions) grind to a halt as these "linked in a chain" transactions fail to execute for lack of transactional volume.

So who to blame ?

Well, we could start with the irresponsible bankers who 5 years ago were still dishing out 110%, 50 year mortgages ! Looking from a buyers perspective this was a no-brainer! Bank pays its clients to enter into the property speculation cycle and if after 5 or 10 years it comes a cropper they simply walk away! On a 50 year loan the personal equity accumulation is near zero for at least the first 15 years - hence the buyer has nothing to lose!

Predictions for 2009? The Spanish banks for the large part may have escaped hanging themselves with the American sub-prime noose but lets see if they don't drown under the flood of negative equity property as home owners simply walk away from these "life term" sentences...