By: fcoa on Mercoledì 06 Giugno 2007 17:37
Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2)
By Sharon Smyth and Ricard Alonso
June 6 (Bloomberg) -- Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see.
``We came to look at apartments but found ghost towns,'' said Usua, a 27-year-old taxi driver. ``You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe so we turned around and left.''
The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the Housing Ministry started keeping records. Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry.
``The real killer of the housing market is the immense oversupply,'' said Gonzalo Bernardos, a professor of economics at the University of Barcelona. ``Prices are already unofficially falling.''
New and existing house prices will drop by 20 percent from now through 2009, Bernardos estimates. The country built an average of 432,411 houses per year from 1996 to 2005, more than France and the U.K. combined.
Spanish home prices have more than doubled since 1998, exceeding growth rates in the U.K. and Ireland, two of Europe's fastest-growing markets. The increase has been driven by a drop in interest rates to less than 3 percent from about 15 percent as Spain adopted the euro, household incomes that swelled as women joined the workforce, and a surge in vacation home purchases by Northern Europeans, mainly Germans and Britons.
`Appraisals Are Poetry'
As prices start to decline, Spanish homeowners may face the same challenges as buyers in the U.S., which is in the second year of a housing slump. Falling prices may spur higher delinquencies as buyers face difficulty refinancing. Spanish buyers may face an even higher risk of losing their property because housing prices are based on appraisals rather than actual sales, and appraisers often inflate values.
``We live in a country where everybody understands that appraisals are poetry,'' said Jesus Encinar, chief executive officer and founder of Idealista.com, a property Web site that tracks existing home prices in Madrid, Barcelona and Valencia. ``Bankers have said to me, `Why do you care if the appraisal is fake? It will be true in the future.'''
The average house price in Spain was 276,300 euros ($370,670) in December, according to Sociedad de Tasacion, a property company. That's up 107 percent since the same period of 2000.
Madrid Leads
Existing home prices in Madrid, now stagnant, may start to fall by 0.2 percent in the first quarter of next year, Encinar said. Madrid tends to lead the rest of the country, so prices throughout Spain probably will begin to drop by the end of 2008, he said.
Banks loaned 250 billion euros to developers last year, eight times more than in 1998, and 134.3 billion euros to construction companies, data compiled by the Bank of Spain show.
They loaned 544 billion euros to homebuyers, four times the value of mortgages in 1998. Bilbao Bizkaia Kutxa has introduced 50-year mortgages and Banco Bilbao Vizcaya Argentaria SA has started making 40-year mortgages. Bilbao Bizkaia also offers loans up to 100 percent of the appraised value. That means even a modest decline in home values, combined with rising interest rates, may result in higher foreclosures.
``The problem here is that people have this unshakeable conviction that prices simply cannot fall,'' Encinar said.
The amount of Spanish families' wealth tied up in property in 2004 amounted to 4.3 trillion euros, or 510 percent of gross domestic product, according to the Bank of Spain. U.S. households held $17.2 trillion of real estate, or 159 percent of GDP, in the same period, according to the Federal Reserve.
Rising Defaults
Defaults on Spanish home loans in the first quarter were the highest in at least four years, according to Standard & Poor's. The S&P Spanish RMBS delinquency index for loans backing residential mortgage-backed notes increased by 23 basis points to 1.75 percent during the first three months, S&P analysts wrote in a report on May 29. That compares with an index level of 0.7 percent in March 2004.
``Banks have lent a tremendous amount to developers who used the money to buy land and now they have no choice but to build houses on it to recoup their money to repay their own loans,'' said Pablo Gaya, head of analysis at Capital at Work Investment Partners in Madrid. ``Any sharp downturn in the housing market would make it even harder for developers to sell and may lead to defaults on loans, which would cause a headache for banks.''
Rate increases have a more direct immediate effect on Spanish families because 96 percent of mortgages in Spain are variable rate, compared with about 20 percent in the U.K. and 12 percent in the U.S.
Economic Concerns
The Organization for Economic Cooperation and Development said in a Jan. 23 report that Spain's decade-long real estate bonanza boosted household debt as a percentage of disposable income to 115 percent in the second quarter of 2006 from 45 percent in 1996, making the Spanish market among the most vulnerable to higher interest rates.
Concerns about Spain's real estate market and economy are keeping Usua and Graneda from buying right now.
The couple now lives in a two-bedroom apartment in the central Madrid neighborhood of La Prosperidad that belongs to Usua's father and uncles. They were hoping to purchase an apartment in Sanchinarro or Las Tablas to have their own place.
The plethora of ``for sale'' signs and construction in both areas also is scaring them off, Usua said.
`Flood of Speculators'
``When rates rise and people who are already up to their eyebrows in debt find they can't pay their mortgages, the last thing they are going to do is take a taxi, or eat out, and that affects you, me and everyone,'' Usua said. The apartments they were looking at cost from 300,000 euros to 400,000 euros.
Just as developers profited from first-time buyers, they also have benefited from investors who bought property in anticipation prices would rise.
The result has been that builders were fooled about the true demand, said Bernardos at the University of Barcelona.
In Sanchinarro, Las Tablas and similar developments, ``a flood of speculators bought up apartments thinking they would make a killing as the boom continued,'' said Bernardos. ``Now big developers are competing with these very speculators for sales as they flee the market.''
Olgar Del Corral, a 32 year-old plastic surgeon from Madrid, said she bought a second home because house prices ``always rise.''
``It's clear that investing in a property is a much safer bet than putting money into the stock market for example where you never know what is going to happen,'' she said.
Housing Starts
BBVA, Spain's second-largest bank, estimates that 700,000 new houses will be built in 2007, 100,000 less than the number finished in 2006.
``If housing starts continue at present levels, the chances of a price crash in the Spanish property market will increase significantly,'' said Mark Stucklin, head of Spanish Property Insight, a real-estate consulting firm in Barcelona.
Investors have already demonstrated their concern that the country's property boom is over. Shares of the nine largest publicly traded real estate companies declined by an average 25 percent in the past six months.
Builders' Incentives
Realia Business SA yesterday raised 783 million euros in an initial public offering that fell short of the property developer's target. The shares were sold at 6.50 euros each and were indicated today at 7.50 euros. Fomento de Construcciones & Contratas SA and Caja Madrid, the company's owners, had aimed to sell the stock for 7.9 euros to 9.7 euros.
Metrovacesa SA, Spain's largest property company, offers 1,000-euro discounts and an additional 600 euros per child during promotional festivals. Lubasa, a closely held real estate company in Castellon, gives buyers vouchers worth 4,000 euros to spend in department stores.
Grupo Pinar, a Madrid-based developer, tempts clients with the offer of a Mercedes C-Class car or a 25,000-euro discount on the price of some of its homes. Valencia Grupo 90 Inmobiliarias throws in a free garage.
Juan Bautista Soler, president of Valencia Football Club and owner of private real estate company Grupo Bautista Soler, was selling nine houses per month from September to December. Now, he said he's selling one per month.
``We're facing what could be a significant crisis,'' he said in an interview in London. ``All developers are feeling it and I don't know why they don't come out and say it.''
Job Losses?
The average value of approved Spanish mortgages fell 8.8 percent in March to 162,265 euros from an average 177,916 euros in February, the National Statistics Institute said last week on its Web site.
``If we do encounter problems in the labor market, then families and banks will have problems,'' said Enric Reyna, president of APCE, the Asociacion de Promotores Contructores y Constructores de Edificios de Barcelona y Provincias, in an interview. ``Interest rates have to be kept at reasonable rates to prevent problems because banks can't extend mortgage repayments much more.''
A 30 percent decline in house prices in two years would trim 0.4 of a percentage point to 0.7 of a percentage point from economic growth each year, International Monetary Fund economist Julio Escolano said in a May 18 report.
According to analysts at Ahorro Corporacion, who estimate that Spain only needs 400,000 to 450,000 new housing units per year, a 30 percent drop in new housing starts is necessary to balance supply with demand. A reduction of that magnitude would result in about 200,000 job losses, the analysts estimated.
In Sanchinarro and Las Tablas, Esperanza Aguirre, president of the regional government of Madrid, opened the first light railway stop last month. No passengers descended from or boarded the bright red-and-blue train this week when it stopped at the station during lunch time. Spaniards traditionally go home for lunch.
``Not even God lives here,'' Usua said.
