The Creation Of The Spanish Real Estate Bubble

Authored by Alexander Alvarez,


  • The euro allowed for easy credit to finance the bubble.
  • Immigration provided labor and customers to the real estate sector.
  • Governments both local and national were complicit in creating the bubble.

The story of the Spanish real estate bubble that popped following the Great Recession started off around the turn of the new millennium when Spain officially joined the Eurozone. At the time, millions of Spaniards celebrated this accomplishment as it was believed that this would be the first step in a new age of prosperity for the country which had suffered a deep recession in the mid-1990s, causing the unemployment rate to rise to a record 24%. Few people at the time could have imagined that this prosperity would end less than a decade later with a far worse recession and an unemployment rate that would break the previous record to reach 27%.

When Spain entered the Eurozone, borrowing rates were higher than those of other Western European countries such as France and Germany; however, those rates quickly aligned themselves as investors believed that Spain would now benefit from the same stability and economic prosperity as that of its Eurozone compatriots. With interest rates falling, banks saw an opportunity to expand their business by targeting non-traditional clients whom could now afford mortgages due to the lower rates. Previously, banks had been limited to going after clients with college degrees whom typically made more money than the average Spaniard, independent business owners with long track records of success, and public sector employees whom benefited from a high level of job stability. The new class of clients however would include construction workers, restaurant employees, factory workers, and practically anyone with a job whose salary was high enough to afford the new lower rate mortgages that banks were now pedaling. Essentially, this meant practically anyone who was employed.

With real estate prices still low and mortgage rates also reaching historic lows, demand quickly began to ramp up. Sales skyrocketed and available properties became scarce within the early years of boom. Obviously, the laws of supply and demand were not absent for too long, and prices began to rise as scarcity took hold of the real estate market.

This had two major effects among those looking to make a quick buck.

The first was that buyers became worried that they would miss out. Some people had bought homes, only to realize a year later that values were up by double digits and then they would either turn around and sell them or hold out for higher profits. Stories of overnight millionaires were soon the nightly talk across bars and living rooms in Spain. TV shows interviewed normal people whom had made small fortunes buying and selling real estate in only one or two years. This helped to create the bonanza effect that usually signals the beginning of a bubble when it seems that everyone “investing” in the bubble asset becomes rich by doing so. Herd mentality would drive demand even higher.

The second group of people looking to make a quick buck were those that saw an opportunity in increasing supply to meet the new explosion in demand. Existing construction companies could not possibly afford to build enough to meet demand and so banks kindly stepped in to offer them the same low interest loans that their real estate buyers were getting. These construction companies then embarked on a massive building boom financed by the same banks that would then offer mortgages to buyers once the projects were completed. It didn’t really matter who you were, if you wanted in on the bonanza, you had to visit your local banker to get the loans to invest in the boom.

As construction picked up, however, building materials such as doors, windows, and floor tiles became scarce. Prices for these began to increase as well since builders needed them to finish their new homes before selling them. There are many stories of towns where a single factory would spawn a dozen or so competitors throughout the boom years. A perfect example of this was the town of Villacañas where around 60% of all doors in Spain were produced. Essentially, it would go like this: One factory would be producing a product and demand would increase significantly and so the factory would see record profits. Before long, the owners would begin to flaunt their wealth by buying luxury cars and homes, thus causing workers to take notice. A group of workers would then decide to pool their money together to open up a new factory producing the same product in the same town. They would then train new people to make the exact same thing, and then a group would splinter from the second company to create a third. The cycle would repeat itself until you had several companies in the same town making exactly the same thing. Construction companies would then know that town “A” supplied doors, town “B” made windows, town “C” made toilets, etc.

With construction now booming, the unemployment rate decreased to levels that were practically unheard of in Spain. This prompted salaries to rise and a new and strange phenomenon began to occur. Up until then, college graduates had higher salaries than construction workers, but with the boom, salaries in construction caught up, and as a result, a high school dropout working in construction could now obtain a starting salary that was on par with the starting salary of someone with a Bachelor’s degree. This of course led many high school students to drop out and start working instead of finishing their studies.

It seemed, however, that no matter how many new workers were recruited, there was never enough to feed the boom. With so many new construction projects being built, wealthy foreigners and retirees began moving to Spain in droves from other parts of Europe in order to enjoy the sun, sea, and sand that the Mediterranean coast promised. With more people now buying properties than ever, a new source of labor would be needed to keep up with demand. This was the start of the mass migration initiative undertaken by the Spanish government. In 2000, there were just under 1 million immigrants in Spain, accounting for about 2.2% of the population; a decade later, in 2010, that number had grown to 5.7 million immigrants, accounting for 12.2% of the population.

In the early years of the boom, the demand had been so strong that new apartments and homes could be sold with ease to Spaniards, and foreigners looking for vacation homes or retirees. But as the boom moved into its later stages, it became apparent that just about everyone in Spain that wanted a home and was employed already had one. The only logical thing to do at this point was to sell the new homes coming onto the market to the newly arrived immigrants in the hope that they could keep the demand going. By this point, the construction industry had surpassed tourism to become the largest industry in the country and there was now no turning back. If the largest industry in Spain were to collapse, the country would suffer an economic crisis of epic proportions. Government officials decided that their only option to keep the party going was by bringing in more immigrants to buy new properties hitting the market.

In a strategy that would remind some of a Ponzi scheme, the plan was to employee the new immigrants in the construction sector and then sell them the new homes that they themselves built, and whenever it seemed like things might crash, they would simply bring in more immigrants to fuel more demand for homes and put them to work in the construction sector so they could afford these homes.

Some might ask why they would employee so many immigrants in construction, and the answer is quite simple. Spain was unable to bring in large numbers of skilled immigrants, so the mostly unskilled immigrant workforce was limited to a few industries which hired mostly unskilled workers. By this point, it was only a matter of time before the crash occurred since it was impossible to ramp up demand using this strategy for very long…

Apart from the easy credit, the allure of instant wealth, and the open doors immigration policy, there was also the role of government in all of this. At several points, there were opportunities to take a step back from the brink, but for the most part, these were all ignored for various reasons. Laws in Spain allowed for banks to loan up to 100% of the cost of purchasing a property which meant no down payment. This essentially allowed buyers with no savings, and often times an unstable job to purchase homes with 30-year mortgages. Some banks even offered 50-year mortgages in case payments were deemed too high. There was also no law that prevented banks from collecting outstanding loans on foreclosed homes, so if the bank seized your home because you couldn’t pay, you would still owe them the mortgage. This led to further reckless behavior from banks because they assumed that even if a client was likely to default, they could still make money off of them by taking the property back and then using legal means to collect on the defaulted loan.

Apart from the laws on the books that helped contribute to the bubble, the government played another very important role in helping to create the crisis. They acted in ways that benefited them to the detriment of their communities and the country. In some cases this was through direct bribery, but in many other cases, politicians in power would take out large loans from banks to build prestige projects for their constituents. By the end of the boom in 2008, Spain had more kilometers of high speed rail built and under constructionthan any other country in the world, with the exception of China which is much larger. Proportionate to its size, however, Spain topped China.

There were also numerous airports built in cities such as Ciudad Real and Castellon by private investors utilizing government subsidies which are now abandoned. Apart from these, there were countless buildings, roads, and bridges built by either local governments or private investors backed by government subsidies which have not been used to the extent which they were supposed to be. All of this public sector waste helped contribute to the construction bubble and these projects suffered the same fate as other building projects when that bubble finally popped. The main reason for building so much; politicians used these projects to promote themselves as visionaries and to show that they could “get things done”. This helped them win votes by keeping attention focused on the new facilities and infrastructure while keeping silent about costs.

Lastly, government revenues also skyrocketed from the boom. More employment meant more people paying taxes. Higher salaries meant individuals paid more in taxes. Construction companies and banks paid more taxes because they made more money, and real estate buyers paid taxes for every property they bought. All of this extra money coming in helped drive Spain’s debt to GDP ratio from 60% in 1997 to around 30% a decade later despite the high levels of government spending. What this meant for the national government was that there was no point in trying to prevent or deflate the bubble. It was always better to just look the other way and collect the increased tax revenue while hoping for the best.

As most of us already know, by 2008, the bubble could no longer be sustained and it popped, creating an economic crisis, which was larger than any that Spain had seen since it joined the European Union in 1986.