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Saturday, 29 September 2012

The Pain to come in Spain

City-types may wish to download Oliver Wyman's report on Spanish bank debt from HERE; released yesterday, that underpinned the estimate of €60bn for Spanish bank recapitalisation. Behind the figures are a sea of human misery to come. Some 42% of the bailout total - some €25bn - relates to projected defaults and foreclosures on retail mortgages, with 86% of this relating to '1st residences' - people's homes. A further 7% relates to second homes, but under the Spanish system in which all the assets of a defaulting borrower are liable, rather than just the subject of the loan as in the UK, it means up to 93% of struggling borrowers could lose their homes by 2014. Potential defaults are estimated from 7% (base case) to 15% (adverse case) of existing mortgage-holders. With around 2.5m retail mortgages in Spain, hundreds of thousands could lose their homes. 

As predicted, the LTV figures on the banks' books are a crock. Or as Oliver Wyman puts it rather more diplomatically, "potentially latent risks not recognized in the banks’ balance sheets, such as outdated house price valuations that are not correctly reflecting present property values". Overall the banks are admitting 62% LTV, which Oliver Wyman thinks should be between 85% (base case) to 99% (adverse case) at 2012 - 2014 OMV. Lenders in Spain are limited to lending a maximum of 80% of a property's value - if OMV drops below this, borrowers are liable for the shortfall, and all of their assets are included in the liability.

However, some economists think even the awful figures revealed in the report don't reflect the true scale of the problem. The NYT published a piece on the 24th, four days before the report's release, the predictions of which are not inconsistent with the official report, but with a harsh conclusion;
Borja Mateo, author of a recent book on the Spanish real estate market, said there were now 1.9 million housing units for sale in Spain and about 3.9 million that could go on to the market in the coming years. With current housing demand now at about 175,000 units a year, Mr. Mateo predicted the glut would cause home prices eventually to fall by 60 percent (OW predicts -30% between 2011 - 2014 - ed). Because the typical Spaniard has 80 percent of his or her assets tied up in real estate, a plunge in prices of this magnitude would be devastating. “What we are seeing,” he said, “is a massive impoverishment of a country.”
 And the impact on troubled Catalunya? Not good:


Anonymous said...

In terms of real estate ( unrealistic valuations ), the UK is different, how?

Raedwald said...

Spain has massive oversupply
UK doesn't

David C said...

This has been a long time coming. I travelled along the north coast of Spain back in 2001 and was staggered by the amount of newbuild, often in unattractive windswept locations. It looked totally unsustainable back then.
As for the UK property market, a return to positive real interest rates is likely to precipitate a substantial fall in prices.

Demetrius said...

Good post, but why do I have to read this kind of story on blogs and the like? We see the floods but not the coming financial storm.

Edward Spalton said...

Very parallel to the situation here before "Black Wednesday" (It should have been Joyful Wednesday) saw us out of the ERM.

Plenty of people here lost their homes as a result of interest rates geared to keep the pound "shadowing the Deutschmark". It was intended as the entrance lobby for us into the euro currency.

As soon as we got out, things started to get better but it had done for hundreds and thousands of homes and businesses before the government was forced to abandon its European vanity project. I was hugely fortunate with a small, new business generating cash and customers in a trade where bills were settled promptly.

The experience did for the Conservatives' reputation for sound finances and was the real reason why voters decided to try that nice, fresh Mr. Blair .

TrT said...

UK house prices were not an issue because the UK GBP devalued by over 20% against Spain.

Edward is spot on.

In truth, the EURO is little different than the ERM

Anonymous said...

Gob smacking Spanish stats, back to the days of Franco and poverty in one - soon?

Anonymous said...

Same thing happened in Ireland... but banks and building societies suddenly relaxed their foreclosure criteria because 1. the bottom had fallen out of the market and 2. massive foreclosures would precipitate a vicious cycle of property devaluation.