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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