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 Existence of the Bubble 

During the years of the generation of the real estate bubble, there did not exist a unanimous agreement among analysts regarding whether it really existed or a speculative phenomenon. Various reasons explain this lack of agreement. Recently, we have determined various procedures that permit them to elucidate, with more preciseness, the existence of the speculative bubble.

Although there does not exist an exact definition of what a speculative bubble should have noted, in the case of the Spanish bubble, big differences between the average increase of the CPI and wages (of 3%) and the annual increases of the price of living up to 17% were evident. That is to say, the price of housing increased 6 times more quickly than wages and the average CPI.

In August of 2007, the U.S. real estate bubble burst, following the subprime mortgage or junk mortgage crisis. A little after the Spanish National Institute of Statistics announced the strong decrease of buying and selling of housing (27% in the first trimester of 2008) and the contraction of mortgages (25% in January of 2008), therefore nowadays this is considered the moment of the explosion of the Spanish bubble.

Construction companies, the main beneficiaries of the increase in prices, used to deny the existence of the bubble, clarifying the interested "myth",  as well as other sectors directly tied to the construction business, for which a bubble did not exist, but was simply a "real estate boom". On their behalf, the sectors in disagreement with the economic situation, more connected to the consumers, mainly affected by the increase of prices and the difficulties of access to housing, insisted in valuing the same data in the opposite sense, the same that other groups framed as a social critique and the Green Movement.

In this sense it is important to keep in mind that one's own expectations about the future evolution of a market influence the real behavior of an individual. That is to say, if many potential buyers estimate that a future fall in prices is nearing, they can opt to wait for this to occur in order to buy. This provokes that the current demand decreases and, therefore, the real prices fall. The same procedure would take place in the inverse if people were waiting for an increase.

On the other hand, the lack of transparency that characterizes the housing market in Spain impeded making exact evaluations of the situation: as you will see below, while one entity sent calm and alarming messages at the same time, the statistics never were systematic and were characterized by dispersion, when they were not simply contradictory, but remaining part of the hidden tax real estate market, upon moving in part with black money or in a form of corruption. In that sense, some specialists denounced even a campaign of a lack of transparency and secrecy of the means of communication that, basing in economic interests, would have avoided to mention the true nature of the boom of housing costs.

In any case, in the first months of 2008 the strong deceleration of the housing market in Spanish already permitted some economists to talk (like Alan Greenspan, the former chair of the Federal Reserve) of a speculative bubble and of its burst. In that same sense, in April of 2008 the own construction companies and promoters recognized that there had been a "large drop in prices and (...) exploded the consumers of the market", implicitly recognizing an overvaluation of real estate assets, drawing a panoramic shadow for the sector and, therefore, for all of the Spanish economic structure. In 2009, still nobody had put in doubt that an enormous speculative real estate bubble had exploded in all of the world, feeling with particular virulence in Spain, which has seen for this reason an immersive deep economic recession.

According to a 2005 cable of the United States’ embassy in Madrid, already then the symptoms of a very considerable overvaluation could be warned against, citing as its causes the nonexistence of a counterbalance of the rent market under an unfavorable legislation - that was not likely to change under internal pressures in the main parties, according to the same cable. Also, it speculated success about that, when the bubble exploded and the financial situation intensified, the government that would have been in power would have summoned early elections.

General Evaluations of the Situation

If the facts about the real estate market were in its accepted days, as we will see, by the different actors, it wouldn’t always be in agreement with the evaluation that makes such data. The same Bank of Spain rejected the idea that would have revolved around a speculative bubble: "The results of the work carried out in the housing market did not support, according to the Bank of Spain, the hypothesis of equilibrium or a bubble, but rather reinforced the confusion that the situation of the Spanish real estate market was characterized at the end of 2004 by an over-valuation of suitable housing with a gradual uptake of the found discrepancy among the observed prices and the explained prices by its fundamental in the long term."However, the official reports of that entity also recognized the over-valuation of real estate assets, and already in the year 2002 alerted about a possible depreciation of housing. In 2003, García Montalvo published one of the first articles about the formation of a real estate bubble in Spain.

Those who denied the existence of a speculative bubble, and at most accepted a small over-valuation of assets, argued a good state of the Spanish economy, the employment and sustained growth data, and very small default rates, attributing the growth of prices to a pressure of demand.

On the other extreme of the balance were situated the critiques of those who estimated that it was before a real estate bubble of unpredictable consequences: "A colossal speculative [real estate] bubble has been developing for many years already, which has been characterized by the Economist (June 18 2005) as a major speculative process in the history of capitalism."In general, from the critical positions it was affirmed that the dependence of the Spanish economy on the construction industry, as well the excessive debt, could have provoked in the long term an economic recession, especially for the fault of the rise in interest rates, that eroded the domestic consumption and raised the unemployment rate and the default levels, provoking, finally, a devaluation of the real estate assets.