Banks & Builders Want New Property Bubble In Spain, Government Obliges

“This plan, far from solving or alleviating the problem, is likely to make it a whole lot worse.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Spain’s second biggest bank, BBVA, just announced that it’s resurrecting the 100% mortgage, a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom. For the first time in almost a decade, property buyers will be able to receive credit equivalent to the total value of the property they wish to purchase. As before, no down payment will be needed. But this time, interest rates will be even lower.

Despite boasting the largest stock of empty housing in Europe — 1.36 million units at last count, almost a quarter of them belonging to banks and investment funds — Spain’s economy is being primed for another property boom. Real estate developers and builders want it and banks need it, not only to fatten their NIRP-eroded margins but also to dispose of some of the real estate assets still lingering on their books from the last crisis.

The government will do just about anything it can to help out. For the coming years, real estate developers want to build around 120,000-150,000 new housing units. It’s a mere fraction of the 700,000 new homes a year being built at the apogee of the last bubble — more than in France, Germany, Italy and the UK combined — but still a lot higher than current production levels.

In 2017, a paltry 43,300 new homes were built — little more than a third of the ambitious target real estate developers now have in their sights. There’s likely to be little change in this trend in the coming years, according to forecasts by the National Institute of Statistics (INE). Between 2017 and 2021 it predicts that around 188,000 new homes will be built – an average of just 47,000 a year.

Much of the current demand for housing is coming from overseas. In 2016, according to data from property registrars, a total of 53,500 units were bought and sold by foreign investors, of which only 8,700 (16% of the total) were new builds. It’s a reminder that ultimately, for the residential real estate and construction sectors to stage any kind of come back, they need fresh blood — something that’s in short supply in Spain these says.

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. For many of those that stuck around, the reality is still alarmingly bleak: according to one of Spain’s most influential unions, UGT, just four out of every 100 contracts signed in December 2017 were long-term and full-time.

As such, much of the new housing supply that is coming onto the market is well beyond the reach of Spain’s new generation of workers, as even the developers themselves concede:

“The houses that are currently being built can not be met by a large part of the demand,” says Carolina Roca, vice-president of the Association of Real Estate Developers of Madrid (Asprima). “Today, 20% of demand is price elastic, while the remaining 80% is not. Although people may want to buy a home, they simply cannot because they do not have enough savings or purchasing power.”

Most young people who have left the family home are renting rather than buying. This trend, together with the massive surge in demand for tourist apartments in big cities like Madrid and Barcelona and popular coastal destinations, is fueling an unprecedented boom in Spain’s rental market. In 2017 alone, rents soared on average by 24%. In the hottest markets, such as the Basque Country, Madrid, Barcelona and the Balearic Islands, the minimum salary is no longer even enough to cover the average rent.

That’s where Spain’s government comes in. Last year it unveiled plans to funnels billions of euros in 2018 into 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. Like the UK’s Help-to-Buy scheme, all it’s likely to achieve is to jack up prices even higher while lining the pockets of large home builders and banks.

The second part is to hand billions of euros of public money directly to developers so that they can build new residential projects that, the government assures tenant associations, will be sold below market price to low-income families. Yet despite the generous use of public funds — up to €36,750 will available to builders for each dwelling they build — none of the new builds will qualify as protected social housing.

In Spain rented social housing makes up 2% of all residential property in Spain, compared to 18% in the UK and 17% in France. The country’s investment in social housing is just 0.8% of GDP, about half the European average. After the crisis, many social housing projects were sold off to international funds belonging to Wall Street giants like Goldman Sachs and Blackstone. José Maria Aznar Botella, the son of former president of Spain, José María Aznar, served as a go-between on many of the deals.

Now, the government is looking to grease the wheels once again. For struggling tenants the new measures are more likely to do harm than good, laments Spain’s Mortgage Victims Platform (PAH). “According to all the experts we have spoken to, this plan, far from solving or alleviating the problem, is likely to make it a whole lot worse, especially with regard to rental prices, which will rise even further.”

But then, the government’s new housing plan is not actually aimed at helping struggling tenants find affordable housing; it’s about kick starting a new property bubble that will provide quick, easy funds for well-placed real estate developers, construction firms, and banks. Once the party’s over, the taxpayers can pick up the bill again. By Don Quijones.

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  16 comments for “Banks & Builders Want New Property Bubble In Spain, Government Obliges

  1. Martin Stewart says:

    Considering there are 300,000 victims of reclaimed properties which the bank moved on during the 2010-2014 they have to do something to get back their social welfare contributions as Wolf states that the 66 Billion social funds is almost dry
    Problem is there too much damage done and will take a long time to recover
    Confidence is in the costal areas at the moment it’s the costa of Crains prices are now 3000€+ m2 so it’s seems a upturn in purchasing again who knows for how long

  2. cdr says:

    So much money and it’s freely available to almost anyone. It’s almost like they just print it up to give away so people can buy houses. Sort of like being dropped from a low flying helicopter, but less obvious. A social good and a physical asset is involved, not money for espresso. Bernanke-like Version 2.

    The EU and ECB know more way to print money to kick the can that there are fleas on a hundred prairie dog’s backs. It’s getting comical.

  3. raxadian says:

    What’s the people gonna do when they lose their houses this time, move to Latin America or something?

  4. Tom Jones says:

    Sounds just like here! Real Estate is never about the average person anymore…but about banks, developers, real estate brokers, and government taxes. As for tax payers picking up the tab…forget it…savers and pensioners pick up the tab when the debt is inflated away by fiat currency expansion. Everybody wins (except the working guy..but hey, he NEVER counts anyway..just folder for the corrupt system).

  5. MC01 says:

    I am more familiar with the interior of Spain (especially Aragon and Navarra) than with the overpriced, overcrowded coastal areas and the collective insanity known as Madrid but I can vouch there’s a whole lot of unsold stock and a whole lot of aspirational pricing.

    I keep on wondering on why people effectively price themselves out of the market.
    The big investment firms are interested in prime markets, the coastal areas where they can rent to foreigners and the big cities where they can charge whatever they want, not depopulating small towns. Yet sellers have jacked up prices, sometimes obscenely so, and then lament (obviously without any coaching; I have found this to be a typical trait in small Spanish towns) nobody is interested in grandpa’s crumbling house located in the middle of nowhere. I like riding there, but if I’ll ever buy another (most likely my last) house it would probably be in France, where prices are considerably lower and where at least I do not mangle the local language.

    It seems to me that a whole lot of people wouldn’t mind another real estate bubble, and I am not merely talking about banking executives and big investment firms.
    I’ve seen this mentality growing up in Italy: real estate can only go up, no matter external conditions. You are not buying a house to live in: you are buying an “investment”, albeit you were never told how to profit from it. The first time when I heard about HELOC was in California in the early 90’s as it was unknown where I had lived up until then.

    I am seeing more attempts at reinflating a real estate bubble even in my ingrata patria (let’s see how many here know their Latin) which are every bit as farcical as those I am seeing in Spain: it’s like everybody believes himself to be in Hong Kong, San Francisco or another ultra-desirable location, not a rapidly depopulating village with horrible roads and somewhat worse sewers or a failed industrial conglomeration.
    Reality has been suspended for far too long: I do not care about sounding mean, but a whole lot of people, and not merely top dogs, need to be brought back to earth.

    • caradoc says:

      Avoiding being hit by the fall out will be difficult. It’s societal. It will ripple across borders. We all end up paying something.

    • simon says:

      ‘You are not buying a house to live in: you are buying an “investment”, albeit you were never told how to profit from it.’

      Many moons ago, as a young man’ i attended a seminar on property investment in New Zealand. They were seeking investment in Queensland real estate.

      The method of profit was to build a property empire by purchasing and using the equity gained by rising prices to fund borrowing to purchase another property, and repeat. All the while using the rental income to fund mortgage payments.

      It ws assumed that house prices would rise in perpetuity and that the rental income would always cover the mortgage expenses.

      Somewhere in amongst all the details were some tax advantages for the purchaser.

      As retirement approached you would have multiple mortgage free rental properties to fund retirement dreams.

      I chose to pay my mortgage off instead.

  6. Steve clayton says:

    Hi DQ are the Spanish banks sitting on massive losses reference these properties on their accounts?

  7. Nick says:

    Would anyone know where those foreign investors come from? I know Chinese buyers are almost gone from Australia so I was thinking if they moved to Europe in a herd sort of behaviour.

  8. Derek says:

    Can anyone remind me when was the last time 100% mortgage became available in Spain? I know some other European countries are now offering 100% mortgage already. See if we could estimate how long afterwards before bubble bursts.

    • MC01 says:

      If I remember correctly 100% mortgages were introduced in Spain in 2005, having been announced the previous year.

      Here I’d like to remind the Banco de España (Spain’s central bank) considers mortages over 70% of the assessed value “risky” and those over 80% “very risky”. In short it’s subprime, only of a different kind.

      BBVA at the moment is the most aggressive mortgage lender among Spain’s largest banks.
      The 100% mortgage is just part of their offering, which includes 40 years mortgages and, most worrisome of all, “over 100% mortgages”. This means I can borrow the money to buy a house and then some… and it wouldn’t cost me that much.
      For the first year I’d pay just 1.93% EAPR, which is well below the real rate of consumer inflation, and afterwards Euribor 6 Months +1.25%. Euribor 6M at the moment stands at -0.27%, so I’d pay just 0.98% in interests, well below even the present official rate of inflation. Here I’d like to remind that while readily available very few mortgages in Europe are fixed rate, and it was like this even before the 2008 Financial Crisis.

      Over the last six months, average junk rated bond yield across the EMU have raised a whooping 40%, albeit the all time low they had reached before means they are still well into Cuckoo Land. Most intriguingly, mortgages haven’t followed suit and still languish at all time lows.

      As I have said several times previously, there’s a very robust attempt throughout the EMU to ignite as many real estate bubbles as possible, and the conspiracy theorist in me is convinced the ECB faction headed by Draghi is thus trying to either prevent a Weidmann presidency or to sabotage it even before it has started. Monetary hawks and real estate bubbles tend to come to blows very soon and there’s nothing better than a nice big bubble to inflate GDP numbers and have something to brag about. Just ask Thai economists from 1995.

  9. govinda says:

    Lol, why not 110%? Does Spain have legalized drugs? They have to be on something.

    That aside, I have on my bucket list a trip out there to the Basque region to surf and then over to Mallorca. I was there when I was an infant, I need to go back as an adult as it looks like a beautiful country.

    • josem says:

      I live in Bilbao and to my knowledge, no, Spain does not have legalized drugs – :)
      As soon as you come to surf the Basque Country: great, good choice and if you also like to eat well, you are in the right place. Michelin stars to tutiplen.
      And then to Mallorca? investigate the smaller islands … greetings

      • govinda says:

        Awesome, thanks for the info Jose. Yeah, the food looks amazing too. I always pick places where even if the surf is flat there’s plenty of other things to do that are interesting.

        Not sure I could handle Ibiza ;)

  10. Koldobika says:

    ?? 1.047€ ?? 1.498€ ?? 1.498,5€ ?? 1.614€ ?? 1.562€ ?? 1.933€ ?? 1.261€ ?? 736€
    Minimum wages.
    Spain 736€
    Come on baby, get it hot¡¡¡¡
    Today driving through Spain listening to spanish news in prime time announcing that housing real estate has increased prices over 4% last year and indicating that it’s a good time for buying not only for residential purpose but also for renting investment. Safe investment they say. Hahaha¡¡¡ The spanish goverment is announcing this through the state owned radio. This is incredible. Meanwhile, nasdaq falling another 3%.

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