Taxpayer-funded subsidies to benefit banks, real estate agencies, construction companies, PE firms, and landlords.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After spending the last few years groggily getting back onto its feet following the collapse of one of the most spectacular — and destructive — real estate bubbles of this century, Spain’s economy is once again being primed for another property boom.
In the last quarter prices registered a year-on-year rise of 4.5%. Rents are also surging, though the country is still home to over half a million vacant properties. The cost of renting in Madrid and Barcelona, which between them account for 16% of those vacant properties, has reached historic highs, according to a new study by the online real estate market place Idealista. In Madrid, rents have risen on average by 27% since 2013; in Barcelona they’ve surged over 50%.
This trend is being driven by two main factors: the recent explosion in tourist rentals [read: Is Barcelona’s Crazy Tourist Boom Too Much of a Good Thing?], as well as a general shift in consumer behavior as more and more people choose (or have little choice but) to rent rather than buy property.
While rents soar, Spain’s mortgage market, the biggest source of profits for the nation’s banks, is also showing signs of life. In 2016 the number of mortgages issued rose by just over 10% to 281,328. But that’s merely a fraction of the 1,324,522 mortgages signed in 2006, just before the bubble burst.
The banks would like nothing better than to issue more and bigger mortgages, but even with interest rates at their lowest point in history, most people either can’t afford the current prices or don’t want to take on more debt.
Spain’s fragile coalition government is determined to change that. In its latest budget announcement it revealed plans to set aside billions of euros in 2018 for publicly funded mortgage subsidies. Young people under the age of 35 who are earning gross incomes of less than €1,600 per month will be eligible for payments of up to €10,800 to help them buy their first home. There will also be rental subsidies for people under the age of 35, for up to half the price of the rent.
The government also unveiled subsidies to help the most vulnerable among the country’s elderly to pay their rent and utility bills, as well as provide much-needed funds for evicted families, many of whom still owe the banks tens of thousands of euros for the insanely over-priced houses they no longer own.
But the prime target of this initiative is the country’s downtrodden youth, which after years of internal devaluation and depression-era unemployment levels has been priced out of both the mortgage and renting markets.
In Spain today there are roughly two million fewer people under the age of 40 in full-time employment than there were in 2006, due to a variety of factors: demographics (i.e. there are now fewer people under the age of 40), rampant job destruction, and the mass exodus of young Spaniards to greener pastures. Even for many of those that chose to stay behind and actually found work, the reality is still alarmingly bleak: according to the Spanish daily ABC, of the 1.7 million job contracts signed in December last year, over 92% were for temporary jobs.
Since the Financial Crisis, precarity has become the ubiquitous reality for most young Spaniards. Many end up earning so little in jobs that offer scant, if any, financial security that they have little choice but to stay at home with their parents, sometimes well into their thirties. According to data released this week by Eurostat, the average Spaniard does not move out of the family residence until they are 29 years old.
If Spain’s new, dwindling generation of “workers” cannot afford to leave home, who will buy or rent the properties sitting idle on the balance sheets of the banks, “bad bank” Sareb, and the global private equity firms that piled into the market a few years ago? And the banks cannot exactly dump all the properties they own onto the market at one time, since it would push prices down, leading to balance sheet mayhem, though it would make prices and rents more affordable and would thus help solve the affordability issue.
Which is where the government comes in. It will spend an unspecified sum of taxpayer funds on a massive subsidies program aimed ostensibly at helping young workers rent or buy a new home. Instead of using that money to expand the country’s paltry stock of rented social housing, which makes up just 2% of all residential property, compared with 18% in Britain and 17% in France, the government will essentially transfer funds from the program’s initial recipients — i.e. the new tenants or home owners — to its intended beneficiaries: the banks, real estate agencies, construction companies, private equity firms, and other private landlords.
If the scheme works, it’s almost certain to provide short-term profits for the aforementioned interest groups while further ginning up house prices, with the result that many taxpayers over the age of 35 and under the age of 65 will get to lose out on two counts: first, they must cough up the funds to subsidize the scheme, and second, if they rent their own home, they get to see the price of that rent soar.
The scheme will also boost Spain’s public debt, which has already ballooned from 39% of GDP in 2008 to 99.4% of GDP in 2016, and it will just keep growing until the day it can’t. By Don Quijones.
But concerning Spain’s banks, Investment bank Mediobanca warns of “clear risk of contagion.” Read… Just How Safe is Spain’s Banking System?