Friday, September 14, 2012

Even before banks try to clean up bad mortgages, Spain housing prices fall by 14.4% from last year

Bloomberg reports that Spanish housing prices declined 14.4% year over year.  This occurred before the banks have started to work through the glut of zombie mortgages on and off their balance sheets.

Given that Spain experienced a real estate bubble that was every bit as large as Ireland's, it is reasonable to assume that Spain will experience a decline in real estate prices from their peak that is every bit as big as Ireland's.  For readers who do not remember, Ireland's prices have fallen by more than 60%.

Spanish home prices fell the most on record in the second quarter as the euro area’s fourth- largest economy shrank and a reduction in mortgage lending crimped demand for property. 
The average price of houses and apartments declined 14.4 percent from a year earlier, the most since the measurement began in 2008, theNational Statistics Institute in Madrid said today in an e-mailed statement. Prices fell 3.3 percent from the previous quarter. 
“The data reflects a significant drop and confirms that prices haven’t bottomed out yet,” said Fernando Encinar, co- founder of, Spain’s largest property website. “Only homes that are heavily discounted will sell as access to credit has completely dried up for potential buyers.”
Please recall that the Spanish government suggested that 100 billion euros would be sufficient to recapitalize banks that have 360 billion euros of admitted direct exposure to real estate.
Spain, which forecasts an economic contraction of 1.7 percent this year, is in its second recession in three years. The country’s 25 percent unemployment rate is Europe’s highest and has diminished lending for residential real estate. 
Since Spain is in far worse shape than Ireland, a 60% drop in real estate prices might be very conservative.  After all, the unemployed don't buy houses unless they are given a subprime mortgage that Wall Street can package as a AAA-rated security.
House prices more than doubled in the decade through 2007, before turning negative in the first quarter of 2008 and have since fallen by about 23 percent, data from the Ministry of Public Works show. Home prices have fallen 32.4 percent since a December 2007 peak, according to separate data from Tasaciones Inmobiliarias, Spain’s largest home appraiser.
This suggests that we are approaching the halfway point of the housing price decline.

I would like to make one additional observation.  The banks in Ireland have been dragging their feet dealing with all the bad real estate loans on their books.  Prices there are likely to come under further pressure when the bank inventory of bad real estate loans comes to market.
The government has passed two decrees this year forcing Spanish banks to make deeper provisions for losses linked to real estate in an effort to push down prices and boost sales....
Spain built on average 675,000 homes a year from 1997 to 2006, more than FranceGermany and the U.K. combined, according to a report by a unit of Spanish savings bank Cajamar. 
The property bonanza that ended in 2008 has left around 2 million unsold homes in Spain, representing supply that will take a decade to absorb, according to Madrid-based property research firm R.R. de Acuna & Asociados. 
“Stock isn’t being reduced and some of it will never be sold because of its quality and location,” said Fernando Rodriguez de Acuna Martinez, a partner at Acuna & Asociados. “Some of it may have to be demolished in the future to stop the slide in prices.”

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