Banks facing up to lower property prices

Spanish banks are facing the fact they will have to price more aggressively to sell, according to some reports

Toughing out the market without resorting to big discounts was a strategy that worked reasonably well for Spanish banks in past real estate slumps, but not this time. Some banks are starting to face the fact that “stronger measures” might be necessary to avoid a Japanese-style slump that drags on for decades, according to a recent article at idealista.com, one of Spain’s leading property portals.

For “stronger measures” read taking a hit. Some banks are starting to talk of selling at a loss to get properties off their books, say Idealista, who point out that banks have been asking prices beyond the reach of most buyers, and as a result not selling much. The only solution is further price reductions.

Zombies in Danger

The problem is that dropping prices has its own dangers, as recognising losses raises the spectre of insolvency for weaker banks. From what I can tell some of Spain’s banks, especially the cajas (regional savings banks), are already zombies being kept alive by the ECB.

Rodrigo Rato, a former Minister of Finance under the Aznar government and now president of Caja Madrid, one of Spain’s biggest savings banks, recently admitted that banks are navigating a difficult course between going too slowly and dragging out the slump like Japan, and going too fast and incurring unsustainable losses dumping real estate in an illiquid market. Banks have accumulated property portfolios with a book value of more than 200 billion Euros, or 20pc of Spanish GDP.

Rato told the Spanish press that the solution must come “via prices or via employment”, by which he meant that house prices must come down, or wages must go up. In my opinion house prices are more likely given Spain’s labour market rigidities, which the current government is doing little to tackle.

And there are signs that banks are taking the some steps towards substantially lower prices, even if on a limited scale. In the last few weeks, for example, the following discounts have been announced:

  • Altamira Santander is offering discounts of up to 58pc on 400 resales, with a 2-bed flat in Tenerife reduced from 98,000 to 68,000
  • Caja Cantabria is offering luxury flats in its old HQ in Gijón with discounts of 30pc (priced between 227,000 and 782,000 Euros, with up to 100pc financing, they are still some of the most expensive flats in Gijón)
  • CAM, a Valencian savings bank, is offering discounts of up to 60pc and 100pc financing, though the offer expires at the end of the month
  • And Banesto is offering flats in Barcelona and Madrid for less than 120,000 Euros

That said, if you really want a bargain you may be better off buying from from a distressed-debt investor, who will have a bigger incentive than the banks to cut a deal. More on that another day.

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