Spanish Property Swings & Roundabouts
November 6th, 2009
The latest figures for planning approvals show that for the residential construction sector there is still plenty of bad news out there. Bank of Spain to double provisions in move that may drive property prices down.
The depressing news for anyone who makes a living building homes in Spain is that in the year to August planning approvals were down 62% to 76,411 compared to the same period last year, and down 0.4% on a monthly basis.
But these figures don’t tell the whole story, now that the Spanish property sector’s slump has lasted longer than a year. The year-on-year decline in the same period last year was over 50%, so compared to 2 years ago, this year’s decline can only be described as a debacle.
It means that Spain’s residential building trade is shrivelling up. All the resources that used to be dedicated to building hundreds of thousands of homes each year are increasingly standing idle. In the boom years the real estate sector, including construction, accounted for close to 20% of Spanish GDP. By some estimates it has now shrunk to 10%, but that is still substantially above the OECD average and way too high for Spain.
It helps explain why unemployment in Spain is heading for 20%. Every point of GDP lost to the housing slump destroys 200,000 jobs. That in turn is bad news for the housing market, as people without jobs can little afford to buy a home or pay the mortgage.
The Bank of Spain plans to introduce a new rule forcing banks and savings banks (cajas) to double the amount they write off when they own a repossessed property for a year or longer. This will give banks and cajas a big incentive to reduce their prices to liquidate their growing stock of repossessed properties and developments.
Under the new rule, banks and cajas will have to increase their provisions from 10% to 20% of appraisal values for repossessed properties they have owned for a year or more.
In the past they only had to write of 10% at the time of repossession. Now they must write of an additional 10% in provisions for properties they haven’t sold after a year.
The new measure, which is expected to come into force in a few weeks time, is being interpreted as a warning from the Bank of Spain that banks should stop their practise of disguising bad debts by swapping debt for property. It will also encourage banks to drop their prices to reduce their property holdings.
Banking analysts estimate that banks and cajas have repossessed property valued on their books at 36 billion Euros. This implies they may have to write off 3.6 billion Euros collectively when the new rule comes into force.
Note, however, that BBVA and Santander, Spain’s biggest banks, are unaffected by the new rule. They were already making provisions of 20%.
Story from Mark Stucklin
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