The government of Andalucia, or Junta, announced yesterday a subsidy of 1 billion Euros to help liquidate the region’s property glut estimated at around 70,000 newly-built homes.
Like the ‘cash-for-clunkers’ programme used to subsidise car sales, public money will now be showered on house-hunters in Andalucia. But second home buyers can stay in their seats as the scheme only applies to local residents buying main homes. Even so, it could benefit foreigners living in Andalucia, and help lift the market out of its slump, which might lift prices for all types of property.
How it works?
The way it works is developers participating in the scheme have to offer their property for sale at mortgage cost, wiping out their margins and giving a discount of 20%. Participating banks, for their part, will loan 100% interest only for the first 3 years. Starting in the fourth year the Junta will offer loans to subsidise mortgage payments for up to 5 years and a maximum of 15,000 Euros. As a result, buyers will save as much as 40% over 8 years, according to calculations by the Junta.
More conditions: The offer stands until the end of 2010, the properties must be newly- built, and the mortgage no greater than 245,000 Euros, the price limit for social housing. Mortgages must be 100% LTV, up to 30 years, charging an interest rate of Euribor +1%
Read the fine print, though, and the Junta isn’t being so generous. In year 9 mortgage lenders have to reimburse the subsidy to the Junta and add it onto the outstanding mortgage, so the borrower pays in the end. Nevertheless, thanks to inflation, buyers will probably have to pay back less, in real terms, than they borrow. Many people expect inflation to take off in the next few years.
You could argue that it is morally questionable for the government to be spending 1 billion Euros subsidising home buyers when there are so many other more needy causes. And isn’t this is just a wheeze to get buyers to pay inflated prices for homes today whilst transferring the burden of payment onto tax payers in the future? Wouldn’t it be cheaper, and cause less economic distortion, just to drop prices today to a level that people can afford without crucifying themselves on a 30 year mortgage subsidised by the government?