Under pressure from the EU Spain is setting up a so-called “Bad Bank” to relieve Spanish banks of their toxic assets. This is likely to have a big impact on house prices.
Thanks to reckless lending in the boom, many Spanish banks are now so overwhelmed with bad debts and toxic real estate assets that the Government is having to bail them out with public money and create a “Bad Bank” to take over their problem assets. The Bad Bank (Banco Malo in Spanish) will be a Government- backed agency like the NAMA (National Asset Management Agency) in Ireland, responsible for managing and liquidating the assets taken over from banks.
There is a tussle going on over who will foot the bill – bank shareholders or the taxpayer – the outcome of which will determine the transfer price of assets between the banks and the Bad Bank: The higher the transfer price, the more we taxpayers will be on the hook for impaired assets, which means bigger losses for us down the road. The Bad Bank is being set up by the FROB fund for bank restructuring.
Once set up, the Bad Bank will be the biggest property company in Spain, with some 100 Billion Euros in assets (by some estimates), including thousands of holiday homes, not to mention some golf developments in places like Murcia.
What this means for house prices depends on the strategy of the Bad Bank, which we don’t yet know (or at least I am not aware of it). The Bad Bank is still being set up, so there is no Board of Directors yet to set the strategy, nor has the Government made clear what it thinks the strategy should be.
Looking ahead, the Bad Bank will have three strategic choices: 1) Liquidate as quickly as possible at any price, flooding the market 2) Wait until the market recovers, keeping prices high and limiting supply, and 3) Segment the market, and liquidate or wait depending on the segment (hybrid strategy). Each strategy will have a different impact on prices.
Prices will also depend on the quality of assets the Bad Bank ends up with. If it ends up with a lot of rubbish, it might not have much influence over prices in the middle and upper markets, where the supply is more limited.
Financing will be another big issue. Will the Bad Bank offer financing for the homes it sells? If not, will other banks step in? If there is no financing to be had, prices in the mass-market will have to fall a long way to find buyers. These are questions to which we don’t yet have answers.
All I can say with any confidence at this stage is that the Bad Bank will have a significant impact on the market. Overall I expect it to create downward pressure on prices, but not necessarily to the same extent in all market segments, and certainly not at the high end. But it all depends on the strategy the Bad Bank adopts, which should become clear over the next few months. I will be following this topic closely, and keeping you informed.