Spanish Real Estate Market Bubble Index (SREMBI) : An introduccion

Among all papers about Real Estate market – And believe me, I’ve read quite a few- the UBS quarterly reports about the Swiss Real Estate market is the smartest, the clearest and the most fine-tuned that I’ve read ever. Quarterly, they analyze several variables linked with Real Estate market and mixing them up, build an index called “UBS Swiss Real Estate Bubble Index”. The mission of such index is to summary a bunch of financial and economic information in order to clarify the situation and to show clearly what too many people sometimes simply don’t want see.

I agree with those guys. I also think that Switzerland is facing a new Bubble. On their last report, they already warned that the Real Estate Market had come in a risky stage that maybe doesn’t have way back. Actually, the Swiss’s experience also say that once you reach the “risk level”, the only way to come back to equilibrium is to go through a bubble. It happened in the lately 80s and could repeat again. Furthermore, if we analyze other economies, through each Real Estate bubble, the same pattern repeats itself. It seems that the Real Estate market is passionate market that once someone heats it, it’s impossible to stop it.

The same happened in Spain. We were fliving inside a bubble during years but nobody wanted to realize of that and we let it explode alone. I wish we had had a Real Estate market index like the UBS’s index. Perhaps, all would have been different!

Anyway, since I’ve been searching something like this to the Spanish Real Estate Market and I haven’t found it, I’ve decided to do it on my own. That’s the result, the Spanish Real Estate Market Bubble Index (SREMBI).

 

20140129_SREMBI_2013q3

 

Briefly: If the market is “in equilibrium”, the SREMBI equals 1. Between 1.25 and 0.75, we can consider that the market is their comfort zone, under control. However, when the SREMBI exceeds the 1.25, we should talk about a Real Estate boom. When the SREMBI is above 1.5, we’re already facing a Real Estate bubble which has only one outcome, a burst followed by an Economic slump. Looking at the graph, we can see that during 2005 – 2007 Spain was facing a bubble, but the Real Estate boom began in 2002. 

Since 2008, when the Bubble broke out, the SREMBI has been running down until the second quarterly of 2013, when things seem to stabilize. In my opinion, it’s still soon to confirm a stabilization of the Real Estate Market, we should wait and check out what happens over the next two or three quarterlies.

Here (SREMBI_methodology) you can find a document where I explain the methodology and the sources used. My idea is to provide an update quarterly in order to understand with a quick look the situation of our Real Estate Market.