Spanish Property Market Review 2012 and Prediction 2013

 

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Introduction and background

The Spanish property market continues to remains within the epicentre of the European Financial “perfect” storm. It appears, at least on the surface, to be taking a battering from all sides with significant contributing factors on both a macro and micro level.  Below we have attempted to look summarize the Spanish property market during 2012. We have also tried to identify the elements which are affecting it and what to expect in 2013.

 

6 million unemployed

Unemployment in Spain at now touching 6m people;  about 27% of the entire population and a massive 55% for the under 25’s.

There are approximately 1.8m houses with no one earning a salary.

It is understood that in the last 5 years, unemployment has risen by about 8% meaning less money circulating, less families working and therefore less people able to maintain or start paying  a mortgage.

Austerity cuts and the reform of labour laws have also contributed with the sharp increase in sackings and redundancies.

Unemployment within the home market has obviously limited spending power and therefore seriously affected demand for properties.

 

 The Spanish Banking Crisis

The turmoil in the international banking sector has led to the restructuring of the banking sector including the merger of minor building societies and their conversion to banks. All have had to undergo a “stress test” and those that have not passed, have gone.  This included the creation of Bankia, the consolidation of 7 regional banks. This created the 4th largest bank in Spain with a business volume of some 486 Billion Euros and 12 million customers. It is partially nationalized.

Refinancing of banks is occurring, with some cash from Brussels, some from the private sector and the remainder simply by cutting loans faster than losing deposits.  This “positive gap” is basically the reduction of credit. Some economists would consider this very short sighted and argue this leads the unnecessary contraction of the economy. Restricted bank lending for mortgages is the result of these “stealth” changes, such as lower lending at about 60% of loan to value, higher interest rates and stricter qualifying conditions, such as loan guarantees and high savings/income levels.

If one looks at the total amount lent on mortgages (billions) over the last 5 years in Spain, a picture emerges showing levels of lending at about 15% of its 2007 level.

 

2007 15.4

2008 8.9

2009 7.37

2010 6.35

2011 3.45

2012 2.17

Spain is also creating a “bad bank” in which it is to place around 200 billion euros worth a of toxic property assets. Some argue this mechanism is clumsy and too big to manage. The government considers that the bank will be profitable and won’t cost the tax payers anything. It will consist initially of land, developer’s loans and residential units.  The bad bank will have a 49% government ownership with the remainder being with investors.

This is the 5th overhaul of the banks in 3 years.

The banks also have to deal with repossessions. Resale prices are now at about 65% of market value, with some lenders getting rid at about 50%. The continued need to sell properties means the banks have to keep dropping prices indicating the bottom of the residential market is unlikely to be reached in the short term.

The consequences of the instabilities in the banking sector have led to a lack of confidence for investors at all levels. There poor performance and lack of liquidity has meant they are also not able to provide retail banking on the levels provided previously and that are required for a recovery. In our view, this consumer service may not return for many years.