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As many Expat dreams of a relaxed life in the Spanish sun start to crumble, lots are packing their bags and planning a return to the UK. But what has caused this dramatic exodus?

Spanish property pundits had been predicting a housing market crash over the last two years. They based their views on the factors of over-building to the point of saturation, build quality failing to meet buyers’ expectations and stiff competition from new emerging property markets both in Europe and farther afield.

These issues did start to impact on sales; the market could have withstood these pressures and indeed rallied. However, the factor that really killed the market was never predicted by any of the commentators. It stealthily crept up and, seemingly overnight, not only sabotaged the Spanish market but the worldwide one as well. The culprit? Credit or rather the lack of it.

Now the rug has been firmly pulled from under the feet of many potential buyers. Through no real fault of Spain’s own making, the credit problem born out of the sub prime mortgage debacle in North America has, like a financial tsunami, made the banks call time on granting mortgages to many expectant applicants.

Over the recent years many buyers have opted for a low interest rate Euro mortgage rather than invest their own hard-earned capital. The banks allowed their policy of only loaning up to 80% of the value of the property to be sidestepped by some neat trickery using over-inflated valuations. The net result being that some buyers completed their purchase with having invested virtually none of their own money. Now that the exchange rate and the overall situation have deteriorated beyond anyone’s wildest forecasts, they are happy to walk away with little or no personal loss. Leaving the bank with a mortgage in arrears and insufficient collateral in a depreciating property market to cover the loan.

Few people will have any sympathy for the banks that seldom take a loss as the financial deck is usually loaded in their favour. Spanish banks now have a steep learning curve because they have never suffered a situation like the one they currently face. After many years of fuelling the property boom with high value mortgages, they have now changed the rules to try to recoup the situation.

The demand to invest still exists. Many people in Britain would like to relocate to Spain for personal and professional reasons. But, with the banks’ backlash to the crisis, potential buyers no longer qualify for mortgage loans. Ironically more would qualify if they were able to show valid pay slips and their true financial situation. However, some have been so busy avoiding UK tax by working in the black economy that their declared salaries are too low to qualify for a mortgage. They have now found themselves trapped in a loop of declining UK market opportunities and diminishing profit but unable to relocate, as they cannot financially establish themselves in the Spanish system.

Therefore, we are at a stalemate. According to the Spanish daily newspaper La Verdad there are around 47,000 new properties available in the Alicante region. There are prospective buyers from all over Europe and beyond. What is needed to close the purchasing loop for many would-be buyers however is currently missing – the finance.

The solution, however and whenever it comes, will be too late for between 700,000 to 800,000 people, according to which paper you read, who have already become unemployed due to the fallout. The ripples are also being felt in the retail arena with furniture shops already closing. Doubtless others will feel the squeeze, including electrical goods outlets, car dealers, and building materials suppliers seeing their profit margins shrinking, leading to further closures, in turn adding to the glut of vacant commercial property.

Political situations are arising with many Spanish immigrants, previously employed in construction, now signing on for unemployment pay and being encouraged by the Spanish government, via financial incentives, to repatriate.

Spanish Prime Minister Zapatero interrupted his holiday – and if you know, anything about Spanish culture then there must indeed be a crisis – which is how the Spanish are referring to it, but pronounced Cresis. The government has mooted many popularity-gaining measures such as tax rebates, reducing tax on property purchases, and a huge schedule of public works construction projects. However, many consider this is too little too late, after the government’s initial refusal to accept there was a problem looming or, until very recently, even existed.

The British expats are badly feeling the squeeze with poor exchange rates influencing their lives in the sun. The really unfortunate ones are trapped in properties on unfinished urbanisations without proper water or electrical supplies as their builders go bust and fail to complete the infrastructures and legalities for contracted supplies. The Expat businesses, mainly bars and restaurants, will struggle to cover their overheads as their customer’s retreat or reduce their expenditure to conserve their dwindling pensions.

Dreams are rapidly turning into nightmares, which are fuelling a significant trickle of people returning to the UK, which could soon turn into a mass exodus. Some may be thinking that perhaps the UK cold winters and high taxation are not so bad, after all, and at least the TV service is guaranteed.

Those abandoning their Spanish mortgages, thinking a return home is the solution, may be in for a shock. The Spanish banks will be pursuing these defaulters and, with their now well-established links to the UK, they will doubtless resort to taking legal action. A further shock will the Department of Work and Pensions, DWP, policy on reinstating benefits which will require people to establish ‘habitual residence’ after a qualifying period of UK residence.

So where would an Expat exodus leave the Spanish economy? There are already reports of a dramatic downturn in school registrations so the school building program can be rescheduled. Banks are starting to close some offices they so optimistically opened on every commercial centre in the urbanisations. Homes will be abandoned with their forlorn and fading Se Vende signs hanging from rusting gates. Many estate agents have disappeared, including the big sales outfits, whilst the new players on the block, or rather Eastern block, have acquired others. New names are appearing in the marketplace as the shrewd East Europeans arrive like vultures to pick over the dead bones of this once-affluent property market.

The sun will still shine but the boom is over and many will suffer hardships until, inevitably, the world economy recovers.