Only ECB stands between Spain and Dubai-style property crash

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    • #55854

      Press Release – Only the ECB stands between Spain entering a Dubai style property crash.

      Sent in by Fairhomes (Gibraltar) Ltd.

      Artificially high benchmarks have been used in the appraisal of the value of Spanish property assets held by banks, leading to incorrect conclusions re solvency.

      The stress tests used various scenarios to investigate whether the banking system could withstand a similar shock to that of October 2008. These included a 10% fall in property values. As even the most casual observer knows there is a large amount of real estate assets held by the Spanish banks and evidence suggests that the benchmark used for these Spanish bank held property valuations were over-stated by 25-40%, making the testing of a 10% correction largely meaningless.

      These high and unrealistic benchmarks for valuations are encouraged by, and in the interests of, the banks as it maintains the value of the distressed property assets in their accounts, on which they can pledge as security with the ECB.

      The method which the banks use to have higher than open market price accepted as the appraisal benchmark for valuations of their property assets, starts with how the banks dispose of the homes they are currently repossessing. The banks are using subsidised mortgages which typically also include 100% mortgages, non-payment windows, extended terms (even up to 50 years) and interest free options to attract buyers. These mortgage deals are being granted at a subsidised interest rate totally at odds with market rates being offered for deposits. Typically, these subsidised mortgage rates are offered at just 0.3-0.5% over Euribor, whilst deposit rates offered by the same financial institutions are currently around 4%.

      The purpose of these subsidised mortgages is to encourage the purchase of bank repossessed homes at valuations that are higher than current open market prices. Indeed they are available only in conjunction with repossessed homes held by the bank offering the mortgage, whereas privately sold homes in the open market must apply through the usual channels for normal mortgage deals, which are typically 65% of value, 25 years and normal market interest rates.

      Accurate property sales information in Spain is near impossible to gather, (witness the official government Tinsa statistics that show only a 10% fall in the last 12 months), this is because details of sales of properties in Spain, are not public information but private.

      The sales information used by bank appraisers of the property portfolios of the banks is based on these artificial sale prices of homes created by subsidised mortgages and consequently they do not reflect true market conditions. Buyers will pay more for a home if it has a substantially subsidised mortgage, as what concerns them is their monthly repayment cost. Furthermore, as the banks now control vast swathes of the country’s property stock they can further artificially manage the price by just drip feeding supply to the market. Whilst liquidity needs would normally prevent banks from holding onto such enormous amounts of non-performing assets, the ECB has overcome this by providing liquidity based on the “valuation” of those assets.

      Anecdotal examples show properties with a subsidised mortgage are between 25-40% above the open market price. On 26th July 2010 in La Corona, Alcaidesa, O&K Property Agents sold a 185m2, 3 bed 4 bath townhouse for 245,000 euros. The bank (Bankcaja) had an asking price on their website for the same townhouses of 342,000 euro – a difference of 28.4%. Another example in Puerto del Almendro, Benahavis was advertised by the bank at 285,000 euros but sold by Remax at 180,000 euros – a difference of 36.8%.

      In effect the valuations of the bank’s property assets are supported by the banks own sales data of their repossessed homes, which are artificially inflated prices by the provision of subsidised mortgages. The result is a self perpetuating cycle where property values are kept high which in turn supports the bank’s approach to provisions against non-performing loans being required only at a low level.

      So it can be seen from this situation, that one of the main foundations of the stress tests – the value of a bank’s property assets – is not based on a real “open market” test but indirectly on figures produced by the very banks they are supposed to stress test. Given that there is €445 billion in loans to the development and construction sectors in Spain it is deeply concerning that the (low) provisions for these loans are based on erroneous valuations.

      Consequently, until accurate open market property values are published in Spain it is impossible to have confidence in the published stress test results and the enormous oversupply of property will continue to block the workings of the open market.

      Whilst the European Central Bank (ECB) continues to supply the Spanish banks with unlimited funds, (and the Bank of Spain remains lenient with rules on provisions) the status-quo can be maintained. But if the cash taps were to be turned off then the banks would look to alternative ways of raising finance, through fire sales of their property assets. This would then result in a real drop in prices by more than the 25-40% at which they are being artificially overvalued, as there is such a volume of properties to unload, and the effect on the 445 billion euro of loans and the personal mortgages taken out at previously over inflated prices would be on a scale of the Dubai property crash.

      The current stocks of unsold property were 687,000 at 31/12/2009 according to the Bank of Spain. Additionally there are approximately 1,100,000 homes for sale, many are empty having been bought by speculators with the intent of selling on for a profit (just as in Dubai). Additionally, over 300,000 homes have been stopped part of the way through construction. In addition banks are sitting on loans for development land often at boom-time prices, land not needed for perhaps a decade and unemployment has just risen above 20%, and ever worsening loan books for commercial properties. Compare this we the UK which in a good year builds 175,000 homes for a population 50% larger. The scale of overhang of empty Spanish properties is likely to overwhelm.

      And by way of comparison, the highest number of re-possessions in the UK was 75,500 in 1991, the forecast for Spain for 2010 is 180,000, which is why the Spanish Financial institutions are under so much pressure to sell those repossessions using subsidised mortgages which indirectly, whilst the ECB accommodates by providing liquidity, delays the day Spanish real estate values implode just as Dubai’s similarly over supplied market did.

    • #100709

      Scary stuff for anyone thinking of buying at the moment

    • #100710

      Its a nicely written article, though I think most will be familiar with the subject matter.

      I think it all going to become very interesting when interest rates start to rise. Even subsidised mortgages will be less attractive and of course rolling over such massive amounts of debt will become costly.

    • #100714

      This piece is badly let down by one glaring inaccuracy.

      witness the official government Tinsa statistics that show only a 10% fall in the last 12 months

      Tinsa is an independent, international consultancy. Its backers are reputed to be the banks, hence perhaps its caution about recording actual prices drops. Also, its figures in fact show a 4.9% drop in the last 12 months. The official government figures ARE laughable.

      I also have to ask myself what the agenda is that led Fairhomes (Gibraltar) Ltd. to issue such a press release? Developers, whatever their nationality, do not have a good track record when it comes to honesty in such media releases. Do they have an interest in talking the market down? If they have cash reserves and are looking to snap up Spanish assets at reduced prices they might.

      I’m going to treat this the same way I do most press releases by developers, sceptically.

    • #100715

      This post by Fairhome could be a resume of the discussions already taken place on this forum. It sums up quite well what is actually happening in Spain and why prices have not yet fallen to their fair value.
      I have no doubt at all the ECB have the capacity and political will to continue lending these huge sums to the banks. It is distorting the market and disguising the true state of the Spanish economy. Its simply propping up a dying horse.
      However as always with things EU the political need of maintaining the facade of a united Europe takes precedence over economics and market forces.

    • #100730
      Chris M

      @brianc_li wrote:

      I’m going to treat this the same way I do most press releases by developers, sceptically.

      Good on you.

      Am left wondering if there is such as thing in this market as a ‘Distressed Vulture Fund’? Want desperately to step in, buy up and make a killing, and getting very frustrated that it isn’t happening.

      @Logan wrote:

      This post by Fairhome could be a resume of the discussions already taken place on this forum. It sums up quite well what is actually happening in Spain and why prices have not yet fallen to their fair value.

      Ahhh…talking of frustrated, unhappy would be ‘Vulture Investors’, talking the market down!

      But, spent a whole morning yesterday truding round a bank stock development, 60 units available out of 100, gardens completely overgrown, no maintenance at all, swimming pool empty, local infrastructure in lead up to the project a disaster, and I don’t care what price they put on it, I wouldn’t be able to promote or sell it – so it will have one day to go to a Vulture Fund, who then will have to completely restore the project and represent it to the market, and I suppose that a good bit of this will take place eventually – in bulk distressed sales.

      So, I get where the Vultures just love to talk the market down, down, deeper and down. So get your cheque book ready Logan, they come to the likes of me first to see if I can help them, when I laugh at the prospect they then go away have another half dozen meetings in the bank and in 12 months go looking for the knockdown distressed bulk sale on the quiet hush / hush, and then some Happy Vulture has a real project to get their teeth into.

      Maybe we will tempt you away from the – not talked down – French market where I think you said you are involved, yet!

    • #100731

      Wow, Spain has been trampled on by the four horsemen of the Apocalypse…

      I don’t know how everybody else is doing, I know a lot of people are trying to shift very cheap properties but I still find that once you offer something that nobody else does a good sale is still there to be had. We’re in South Costa Blanca, the cheaper area of Spain but we have had 4 sales this year that have been over 400,000 € and one of them was over half a million.

      So in 2006-2007 we sold treble what we are going to sell this year…but unit wise we are up around 10% from 240,000 in 2007 to 266,000 € in 2010.

      I just think the market got saturated with rubbish property and something different is a breath of fresh air in someones IT.
      The clients who have bought have small / medium size businesses in their own country (Holland, Belgium, UK and Russia). They are not buying for investment they just like living here, nothing more, nothing less. Their investment is in their business back home.

      So when I hear this propping up dead horse stuff, sorry, I just don’t see it. I’m not going to paint a rosy picture because there isn’t one but those are my sales for this year and those are facts. By the way, those are the prices people have actually paid, we have dropped prices but only once a client sits down with us and wants to seriously negotiate.
      So in actual fact, if we used list price, the average unit price would have been higher.

    • #100732

      If you are an investor or speculator, I think the two things are similar, understanding market behaviour and future trends is a necessary tool. Unless that is you are a reckless gambler. Simply stating how many sales you have achieved this year or last week means nothing. There will always be a small pool of buyers seeking a lifestyle choice and will buy whatever the market state. One swallow or three does not a summer make.
      The mass Spanish market is now entering a new stage. It’s being politically manipulated by the ECB and the Bank of Spain to avoid further catastrophic losses.
      That fact is only of interest to market investors and completely irrelevant to the individual who seeks a holiday home and agents seeking to sell individual properties. Investors don’t use agents in any case and certainly ignore anything which passes their lips.
      We are talking about two different animals.
      I have a picture in my mind of how I think the Spanish property market will turn out in five years time. I think in those time frames.
      You as agents will need to be content to live from small pickings for that time and probably longer.

    • #100733

      If I were a serious investor I wouldn’t be looking at spanish property websites. These sites are for people looking for something they can buy to USE and hopefully it will turn out to be a good investment, end of.

    • #100738

      Agreed Katy. Most of the time web sites such as these are of little use. Occasionally however you hear a voice from the ground which gives you a small insight. Since I’m not on the ground and no longer invest in Spain it’s principally an amusement which keeps me a little up to date. 🙂

    • #100766
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