by Paul Gibson
Home >> Unsustainable
Just this past week, interest rates jumped another hurdle, leveling off at 3.25% for the entire Eurozone. As interest rates begin to slowly rise at previously unknown rates, the amount of money every Spanish family has to face their monthly payments is less and less.
In a report dated October 2, 2006, EU authorities said that the average Spanish family is falling deeper and deeper into debt. The EU has issued a warning to the Spanish authorities categorizing the situation in Spain as “unsustainable� growth. And just today, they have published another interesting fact about the use of Visa credit cards. The amount of money that Spanish consumers took out on their Visa credit card has increased by 15% in just one year.
What does this mean for the future? Spanish consumers (that’s you and me) will have to dig deeper and deeper into our pockets to find those precious céntimos to pay back our student loans, make our car payments, or God forbid, make our mortgage payment.
Mortgage rates have just risen by an approximate 80 euros a month. But the bad news does not stop there. The statistics used in this study are the ECB (European Central Bank) rates, not the interbank rate, which is now at 3.74% and expected to rise to 4% by the end of the year. This is the actual rate that is used to determine how much your bank may raise the interest on your mortgage.
So let’s recap here for a moment. The actual increase in mortgage rates is going from its previous level of 2.4% to a whopping 4% in less than a year. That means an annual increase of 1.5% on your mortgage. This doubles the interest you have to pay.
Be careful though! This may not necessarily be your case. It all depends on the amount of your mortgage, and the number of years you have left to pay it off.
So now who’s laughing? No one. All of this begs the question: where are we… where are you… going to find the money to pay for all of this? Salaries aren’t changing any time soon… and as consumer spending and savings decrease, the logical conclusion is that we are headed for a recession. That’s right, the “Râ€? word.
Hey, we are not alone either. I mean, Ireland, Holland, and Luxembourg are up to their ears in debt, around 70% of their Gross National Product (GNP).
But I am sure we will find a long-term solution. I mean, we will probably ignore everyone anyway and continue to ask for more and more loans, to pay off mortgages with black market money (with our other mortgage), and so on and so forth. We can just wish it all away. Better yet, we could just whisk it all under the carpet and act like nothing is happening. Doesn’t that sound like a good idea? So the next time you go to the supermarket, you can rehearse answering that question: “Will that be cash or credit?� And with all that practice you have, you will undoubtedly respond: “CREDIT, OF COURSE!�
1 Cinco Dias, online version. October 2nd and October 6th. For more information, go to www.cincodias.es
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Posted on http://www.weeklyletter.com at 2006-10-10 12:00:00 +0200
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Which is the solution?
What will happen with those who want to buy a house? people who need a house to live not to earn money in the future.
They have to wait, to rent…..or remain at parents house?
Why spanish average debt is so high?
Maybe someone is earning a huge amount of money.
I don’t agree with a possible consumer spending decrease, because there is much money in the pockets of a few persons.
Angel
I agree with the article!. My family and I are one of those families full of debts. I don’t use the Visa because I know the consequencies but it’s very difficult to reach the end of the month with money one’s pocket.
Thanks for your comment Angel!
You make a valid point: It would appear that a rather large percentage of the wealth here in Spain is concentrated in the hands of a select few. But hey, there’s still a lot of money out there to be made!
Why is the debt so high? ...That’s an easy one to answer. Businesses refuse to raise salaries. We were better off with the peseta..we had more “purchasing power”. Now we have to figure out how to kill the monster we have created! Thanks again!
Paul
Thanks for your comments Mr. / Mrs. “A”.
You bring up a valid point. I wonder how many people out there also have trouble “making it” to the end of the month with interest rates so high. Maybe those of you who do not have any long-term obligations may be okay, but families are really struggling. There is not one family I know that does not “share” expenses, child care, homes, meals, or transportation. Hooray for the family spirit! Bah, humbug to real estate companies!
Paul
I do agree with the article. Fortunately mine is one of those families than can face not to badly the monthly payments. There are no tricks but two salaries, and a responsible expending, combined with a very exhaustive control of every payment.
We don’t use our credit card very often, in fact we almost don’t do it. We just buy what we can afford (even the mortgage!) and try to take advantage of any offer we find. For example, I usually buy my kids’ winter clothes for the following year, in the sales of the current year (when summer is about to turn up). It’s quite “hard� to buy a wool sweater or a coat in May, but it’s cheaper than doing it in September. Outlets are sometimes a good option too. I’m always keeping an eye at the supermarket deals, and at whatever “offer we can’t refuse�.
I have to say that life in Spain has become much more expensive since the Euro was introduced. A short time before Euro, one coffee costed 120 pesetas and now it may be 1.20 € wich is a more than a 60% higher. Just try to think about the supermarket trolley!
Regards,
Merche.
Excellent article!
I think that today we have have stronger shopping habits that we did 10 or 15 years ago. Just take a look at all the shopping malls that have openned in the last few years, they are always full.
Regarding the price of the houses, I am completely against it, but the only thing that can be done is to RENT istead.
So here is my piece of advise
As Confucius said over 2,000 years ago: “The only constant is change”.
Regards,
Cristina
How can anyone think that you can own something? It’s all renting really. You can’t take it with you when you go.
Good morning Donal!
You introduce a whole new way of looking at things! How can you “own” something…it’s all renting..! I think that is a brilliant observation! However, the major difference is really what you can do when you rent or when you buy. Renting: throwing your money away, without any chance for recovery. Buying: Investing your money. Why? Because you spend the same amount of money (or sometimes less), but then you can use your house as collateral to get more money, sell it for a profit or even rent it out! I know that your comments may have been leaning towards the philosophical side though… after all, if life is a gift, that would mean that we owe our time to others and some (like me) would say to God as well.
Great comments!
Paul
Good morning Merche!
Excellent observations and comments. I must admit, that I see myself (and my family) reflected in your personal situation. Responsible spending is easier said than done, but you are absolutely correct.
How were we fooled into this whole “euro” thing anyway! What a disaster! I am with you on that!
Paul
Good morning Cristina and thanks for your insight!
Renting is better than buying?
I believe that I would agree with you up to a certain point: HOME is where my love is…so wherever my wife and daughter are..well that’s definitely HOME. On the other hand: ‘Casada, casa quiere’ ..... My wife is definitely not going to let us rent for another ten years! Ha ha!
I like the Confucius comment…. I wonder what he would think about this Business Weekly of ours!
“Smart man is like fish: keep mouth shut and stay out of trouble” – Confucious?
Hi,
Unfortunately, the medium social class will “pay� the consequences of this situation. It’s absolutely impossible that a medium salary of 1000 euros was able to support this extreme prices growth.
I still remember when I couldn’t imagine a higher price for a flat in Madrid only three or four years ago. I told myself: “the prices have just reached the limit, since it’s not possible to assume an upper debt” (a flat with three bedrooms used to cost around 240.000 euros those days). However, I was still amazing. Effectively, it was!!!
At this moment in time, you can’t find a flat of this characteristics costing less than 400.000 or 500.000 euros. And the situation is not much better next to Madrid. Cities like Alcalá de Henares (30 km) or Guadalajara (50 km) have seen how the prices rocketed more and more due to the border effect. How is possible that 100 m2, for a new building, cost in the centre of Alcalá de Henares: 600.000 euros? Are we definitely crazy? And in spite of that, there are people who buy them!!!
So when I listen comments like: “the situation is going to improveâ€? or “prices won’t increase more than the IPC the next yearâ€?… I don’t believe it. I can’t be optimist, since many people still earn a lot of money with this kind of business and a lot of B money have to be “cleanedâ€?. Did you know that currently most of the five hundred notes are in Spain? Without comments…
Gloria
Thank you for your comments Gloria!
You have some great observations: Unfortunately, I am just as pessimistic as you are. I have decided not to “try and change” real estate prices, but rather find new ways of making more money. That seems like the only way out for now…until we get some “real” white collar police to get rid of all of this corruption in real estate speculation.
Thanks again!