The storm that engulfed the stock market over the past few years forced Spanish investors to look for new places to invest. Real estate became the most appealing option because it offered a refuge against stock price volatility. Little by little, many investors abandoned the exchange floor in search of greater profits in bricks-and-mortar. But this trend may have reached its end with the arrival of 2004. The uncertainties created by an overvalued real estate market, combined with high expectations for the stock market, have led many to look more closely at both types of investment.


Rodrigo Rato, Spain’s first vice-president and minister of the economy, was the first person to recognize this trend change. In some speeches early in the month, Rato noted that the trend of acquiring real estate in order to counteract the weakness of the stock market had begun to run out of steam. The gradual recovery of the exchange and the bubble that is being created in the real estate market are the main factors behind this transition.


According to Pilar Gómez, professor of financial economics at the Complutense University of Madrid and an expert in the Spanish real-estate market, notes, “the two markets have evolved in opposite ways since the middle of the 1980s.” It follows that if the stock market experiences the improvement that many people predict for this year, the real estate sector will suffer a called-for slowdown in prices and, as a result, some investors would return to the stock market. Nevertheless, José Luis Suárez, professor at the International Center on Real Estate of the IESE, at the University of Navarre, suggests that “there won’t be any major changes because the characteristics of investors in these two markets are different, by and large. Moreover, over the past year many people have discovered the attraction of investing in real estate, and they are not going to move out [of that market].”


During 2003, the Ibex-35 index experienced growth of 28% and finished the year brushing against the barrier of 8,000 points. That trend will continue if the good mood that characterized the start of the new fiscal year remains. For the moment, the global economic outlook invites confidence, given that “most economists are optimistic about the progress of the global economy in 2004, which would be reflected in the stock market;” in addition, “this optimism is present among consumers and business people,” says María Jesús Valdemoros, director of the department of quantitative economics at the Círculo de Empresarios [in Madrid].


Suarez estimates that the market will enjoy a rise of between 9 and 10% this year, which would mean a rapid positioning of investors in order to avoid letting escape the favorable wind that will blow on the Spanish market. Nor should investors lose sight of international financial markets, since some markets such as the NASDAQ have risen 48% while the German Dax has risen 30%.


Advantages and Disadvantages

However, not everything that sparkles is gold. According to the experts, the main disadvantage of investing in stocks compared with real estate lies in the risk that comes from instability and uncertainty in financial markets that are exposed to numerous current situations – conditions affected by international economics, management, geopolitics, and so forth. Thus, at the moment, the favorable economic outlook and low interest rates that continue to cheer up variable-income markets contrast with the shadows cast by the excessive depreciation of the dollar, which can endanger the economic recovery of the euro zone. On the other hand, a strengthening of the American economy, together with a rise in interest rates at the beginning of the year on the part of the United States Federal Reserve, could bring with it a stock market year in which performance is more modest and not as bullish, as one would hope.


Whatever the characteristics of the investor, generally speaking, “stock market investment suffers from a much higher level of risk than investment in real estate assets, which is more secure and, above all, more difficult than any losses or depreciation that may exist in business operations, which is something that can easily happen in the stock market,” says Gómez. Moreover, the rising housing prices are the clearest demonstration of the attraction that this type of investment continues to hold for savers. The figures speak for themselves: According to a study by the Appraisal Society of Spain, in capital cities of Spanish provinces the average price of new housing rose by 15.8% in 2003 compared with 2002.


Nevertheless, experts doubt that the spectacular upswing in real estate prices of the past year will be repeated. Rato has expressed confidence that a “deceleration in the price of housing” will take place. Adds Suárez: “For three years, they have been saying that prices would stop going up; no one can be sure that this year will be the inflection point.”


In recent months, several official voices have warned of the dangers that a real estate bubble would involve. At the end of last year, Kenneth Rodoff, chief economist of the International Monetary Fund, noted in a report called “Global Economic Forecasts,” that there is a “significant possibility” that a real estate bubble will burst in those countries where prices have risen drastically in proportion to the decline in interest rates. The report put together statistics in those countries with the greatest price increases. Spain, with 17.5%, was at the top of the global rankings along with Australia and the United Kingdom. According to Suarez, “if prices continue to rise, it would be damaging because housing would become too expensive in comparison with our GDP. We cannot forget that in Spain, we are at the highest levels of the world, along with Japan, the Netherlands and the United Kingdom; above Germany, France and the United States.”



Nevertheless, it seems that there will be no bursting of the bubble, according to a report by The Economist, the prestigious British magazine. In one of its most recent issues, it noted, “The existence of a bubble does not mean that a collapse is imminent. Prices could rise even more, or they could slowly drop. Nevertheless, one thing seems certain: Given current values, those who bet on new increases will remain disappointed.”


Kenneth Rogoff, chief economist of the IMF, has explained that “housing prices are very sensitive to interest rates and … if there is a recovery in long-term interest rates, real estate rates will rise.” Currently, rates are a few tenths above the 2% mark. Before the economic recovery, more than a few people predicted a rebound in interest rates of between 0.25 and 0.50 basis points.  Rato also declared at the beginning of the year that the lower price of money is playing a part, and that rates will probably rise in the next few years, possibly as high as 5%.


Another possible consequence of a rise in interest rates is a cooling off in the real estate market. For Suárez, demand is a decisive favor, depending on the capacity of purchasing, and the experts agree that demand will continue. Therefore, only prices and the volume of credit that is financed will be affected.


Profitability Past … and Future?

According to Suárez, this scenario means that making the decision to invest in one market or the other will depend on “the type of investor, the value [of the investment], the risk that he or she wants to take on and the period of investment.” Even if one deals exclusively with market behavior, Gómez notes that “the Spanish stock market is cheap, and from that point of view it is a good time to buy whenever there are expectations for growth in specific share prices and, equally, in order to achieve capital gains.”  For María Jesús Valdemoros of the Círculo de Empresarios, “in the short term, the stock market can be much riskier, since we’ll have to see the impact of the Parmalat scandal and of a possible rise in interest rates. Then, everything points to very modest growth in Spanish industry, with stagnating earnings and a slight loss of employment, which will lead to a decline in share prices.”


In the real estate market, “we don’t recommend that people invest with similar expectations concerning price increases. Past profitability does not mean future profitability,” Gómez maintains. In fact, projections call for a rise in real estate prices from the 6% projected by the BBVA to 12%, at the most optimistic end. But María Jesús Valdemoros adds that, “In any event, the upward movement of real estate prices will not reach the 17% mark of the past year.” According to Valdemoros, for the average long-term investor, it would probably be riskier to invest in real estate now, given that a correction in the price of real estate assets, while not imminent, will take place before long.


Whether it’s investing in the stock market or in real estate, when it comes to forecasting which trend most people will follow, Gómez says: “Although it is possible that the recovery of the stock market will drive some investors out of real estate assets into a search for profitability in the stock market, this won’t happen on a massive scale.”