Why did the property bubble burst?
If you’ve ever blown soap bubbles, you’ll know that no matter how big they get, they have to burst. This is what happened in the Great Recession of 2008, where the banking bubble burst and the world felt the full impact.
Everyone is connected now, so that one country having trouble with its money can cause problems for another. The same rules that make it easy for us to holiday abroad also mean greater risk when it comes to money.
The financial crisis began in 2007, when it was revealed that banks were taking more risks than they should have been, giving out inappropriate loans, benefiting from deregulation, and finding themselves in trouble when money could not be paid back. It spread over the world in 2008.
When the banking system collapsed, other markets felt the sting. In Spain, for example, where property prices rose between 1996-2008, lack of financial confidence lead to prices dropping dramatically, which meant that fewer workers could be employed to build homes and many construction sites were literally abandoned even if houses had already been bought by foreign investors.
Plenty of Spanish construction companies were also dramatically affected by the crash because they relied on loans to fund their projects, collecting on the projects when they were done and sinking all the money into another project. The crash meant that their liabilities exceeded their assets and so they only had enough income to repay the interest on their loans. Workers could not be paid, and were let go—turning everyone’s dreams into nightmares.
One eerie side-effect of having built so many new homes and then finding the crash meant that people didn’t want to move is that plenty of these developments now resemble ghost towns. Towns built for thousands of people now only hold a handful of hundreds, and as you pass from the centre to the edges of the town, the houses turn into half-built abandoned skeletons.
Understanding how the crash happened is not crucial for knowing what you should do next with your European property, but it does give some perspective on why banks—in particular, Spanish banks—are so anxious to recover their money from foreign owners who can no longer keep up with payments for their property.
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