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Banks keeping price of property artificially high

A recent article in one of Spain’s leading papers points the finger at banks for keeping the price of property artificially high

Why have property prices fallen less in Spain than other countries that had property bubbles like the US and the UK?

One reason is because the official housing price data in Spain is completely dodgy, but that’s not the full story. It doesn’t explain why asking prices haven’t come down by more.

A recent article in the Spanish daily El Mundo gave another reason why prices haven’t corrected as much as one would have expected: price manipulation by the everyone’s favourite villain, the banks.

“With the majority of the big developers drowning in debt, the banks are now the ones who determine the rhythm of prices,” explains the article.

How are banks keeping price high? Firstly, by improving financing terms rather than reducing prices. “The main answer is that the banks are selling their own stock by improving their financing terms rather than dropping prices, “explains the economist José Luis Campos Echevarría. “This strategy will cost them in the medium term, but it lets them solve the big problem they have in the short term, which is to off-load properties without prices falling too much.”

And secondly, by drip-feeding their stock, rather than flooding the market. Spain may have a monumental housing glut, but banks are keeping a big chunk of it off the market.

Banks are also back to the bad old practise of offering 100% financing to buyers of their stock, allowing them to attract people without any capital. “They are making the same mistakes as they did in the boom,” one expert told El Mundo.

What the article doesn’t ask is how long can this go on? As I see it, as long as the European Central Bank (ECB) continues to supply them with unlimited funds, (and the Bank of Spain stays lenient with rules on provisions). Were the ECB to turn off the money tap, banks would be forced to get money from other sources, like dumping their property portfolios at any price.

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