June 9, 2011 at 1:09 pm #56252
Nomura says Spanish banks are funding 24 years worth of housing
by Tracy Alloway on Jun 09 09:44.
During the Spanish boom of 2004-2008 the country started construction of about 3.26m new houses, according to Nomura’s figures, and sold about 2.86m in the Costa Brava beach house craze.
By the end of 2009, however, the financial crisis had erupted and left Spain with a stock of unsold houses of almost 700,000. By 2010, the number of new houses being sold had dropped to 200,000.
So there’s still quite an overhang in housing supply — and banks are still on the hook for future construction. According to Nomura analysts Daragh Quinn, Prathmesh Dave and Duncan Farr they’re on the hook for decades worth, implying that if housing doesn’t pick up there could be more bank losses.
Here’s Nomura with their calculations:
The total Spanish loan book funding real estate and construction activities is EUR 430bn. Based on the disclosure of the Spanish banks, just over EUR 300bn of this relates to residential real estate activities (so excluding public works and other non-real estate related lending.). Of this EUR 300bn some 80% is funding direct real estate production (excluding non production related loans). Based on the loan to values estimated by the Bank of Spain, we calculate that this loan book of c. EUR 242bn is funding assets worth some EUR 345bn. This represents completed houses, houses under construction and undeveloped land (both urban and non-urban).
How many houses will this portfolio of EUR 242bn produce? Making some assumptions on average house prices (we assume prices continue to fall over the next two years), time to construction and the value of land within the total value of a house, we estimate that this portfolio could mean as many as 3.6m new houses. Based on the current rate of sale of 150,000, (2011 annualising at 100,000 but versus c. 200,000 in 2010) and assuming all these houses are brought to market, we believe this implies some 24 years of supply. This calculation is a result of the different assumptions we have made, all of which could be made more conservative or optimistic. For example, were we to assume that the annual rate of new-house sales could reach 300,000; this would imply c. 12 years of potential supply versus the 24 years in our base case estimate. Conversely, assuming a rate of just 100,000 new-house sales per year would imply 36 years of supply.
In other words, banks could be funding a whopping 24 to 36 years of new Spanish housing.
Nomura reckons almost half of that €300bn figure (17 per cent of the banks’ total loan book according to publicly disclosed figures) could end up being problematic — yet only €43bn in loan provisions exist (making for a coverage ratio for bad loans of 29 per cent). Needless to say, the outlook for Spanish housing isn’t sparkling either what with stubbornly high unemployment and looming interest rate rises.
Nomura’s forecasting a up to a(nother) 15 per cent decline over the next two years.
Spain’s policy response has so far been to extend and pretend on a massive scale (and who can blame them really? Ireland very publicly announced banking losses and ended up crushing its entire economy) but it is predicated on the market playing ball, and a certain degree of price concealment. On that note some upcoming IPO docs from Spanish cajas should make for very interesting market reading.
June 9, 2011 at 9:20 pm #104906
A large amount of the stock will be demolished. They’ll have to clear it one way or the other in less than 24 years or else the forces of nature will make sure the flats are worthless long before then.
June 10, 2011 at 12:26 am #104909
perterhun – great fine with the numbers.
I like to see clean base numbers to form my own conclusions. I like their numbers but the 24 year figure I do not agree with.
I think the 150K number is not a bad one in the short term, but I would push it more to about 200K. My biggest beef is with the average book value per house (my father-in-law was the chief construction foreman for a good size, fairly honest constructor) and based on his comments of cost increases between 2002-2007, everything skyrocketed. We are not just talking about land price, local tax increases and corruption etc. His main beef was all the new materials, insulation, sub terrain parking and even doubling the amount of parking spaces per apartment by law. Their book price is half what it should be so that means the number of houses in my estimate is half theirs standing at 1.8 Million, so between 10-12 years of houses..
June 10, 2011 at 8:06 am #104911
This represents completed houses, houses under construction and undeveloped land (both urban and non-urban).
This point needs to be emphasised – a large amount of the debt maybe in land, not completed houses. This land is now worthless, so I think the real point is not that there is 24-36 years supply of property that will be built, more like that the funding provided for it will be lost because much will never be built.
So the banks will eventually have to own up to having lost a lot of money that will never be recovered.
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