Banks to reduce debt-for-property swaps with developers

Yesterday I reported that developers are having to drop their prices to compete with banks selling repossessions with preferential mortgage terms; now I read, in the Spanish daily El Pais, that the banks can’t cope with any more property, and have privately warned developers they won’t be swapping any more debt for properties.

The problem is that, thanks to foolish lending in the boom, banks and savings banks (cajas) are having to swallow an increasing amount of bad debts, and not just in the property sector. The banking sector’s bad debt ratio rose to 4.12% in February, the highest level since January 1997, and is expected to increase to 9% by year end. Raging unemployment in Spain is part of the problem; people without a job can’t pay their debts, and Spain has 4 million unemployed, up by a third in a year.

Against this background, Spain’s banks have had enough of debt-for-property swaps, which means developers will have to live with the properties they can’t sell (estimated at anything from 800,000 to more than 1 million). That might explain why a leading developers’ association has called on the government to buy up the surplus new housing inventory, a suggestion that the government has rejected this out of hand.

All of this means that developers will now have to selling at any cost, offering genuine discounts, argues the article in El Pais.

What the article does not explain is that some newly-built property will sell without much of a discount, because it is attractive and in short supply, some property will sell if the discount is big enough, because there is a market for it at a certain price, and some property won’t sell at any price, because you couldn’t give it away.

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