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The only way is down

13 April 2012 By Fiona Maharg-Bravo

Spain’s property market has been crashing in slow motion. Now the decline is accelerating.

House prices are down between 22 and 29 percent from the 2007 peak, according to various indices, against roughly 50 percent in Ireland. But there was an 11.5 percent year-on-year fall in March, according to Tinsa, the surveyors. And the trough probably still hasn’t been reached.

An average family still needs 6.2 years of its combined annual income to buy a house, well above the long-run average and more than double the U.S. ratio, according to estimates by Exane BNP Paribas. Unemployment is at 23 percent and still climbing as the economy falls back into recession this year. Given the combination of still-high prices and the ongoing credit crunch in Spain, net mortgage origination has predictably fallen off a cliff.

Banks might give house prices another downward nudge this year. Lenders own nearly 20 percent of the country’s estimated one million empty homes, according to Cheuvreux estimates. They have been understandably weary of selling houses and crystallising losses. But they effectively have little choice. The government is demanding haircuts foreclosed properties of 35 percent on average.

Once banks start to write down the value of the properties, the theory is that they will be more willing to sell at large discounts. And anecdotally, banks are already flooding the market with cheap property. Santander, for example, launched a firesale of flats in Sesena, Toledo, at less than half the original asking price. The good news is that Santander’s subsidiary, Banesto, managed to sell more units than it foreclosed in the first quarter of this year. Strong banks such as CaixaBank or BBVA will follow suit, but thereby lowering prices further.

Of course, not all lenders will dump their stock. The new provisioning requirements may not be severe enough to force everyone to take the pain. Lenders that merge are allowed two years to make the write-downs, in turn limiting new supply. The simple reality is that the housing market is heading lower, and banks sooner or later face further losses. The adjustment is necessary, but will only sustain the sense of crisis in Spain.


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