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Mixed signals from the Spanish property market

Posted on October 26, 2010 by Mark

Anyone keeping an eye on the Spanish property market could be forgiven for feeling a little confused right now. On the one hand official figures show prices falling, though not by as much as you might expect given Spain’s economic problems. On the other hand, annualised sales surged by almost 30pc in August, after 8 consecutive months of growth. These two bits of news are at odds with each other. So what’s going on?

A recent article published by Fotocasa – one of the biggest property portals in Spain – might help to shed some light on this apparent contradiction.

They get data and opinions from various sources to see if a recovery is genuinely under way or if it just an illusion.

Several sources report a recovery in sales starting at the end of 2009 and lasting the first half of this year, driven by the elimination of mortgage tax breaks in 2011, and the rise in VAT this year, both of which brought sales forward, plus low interest rates, and the effort banks are making to shift their stock of property. Fotocasa themselves have seen listings rise 103% in a year, and property searches rise 55%. All of that suggests the market has bottomed out.

Just an illusion

But then along comes Borja Mateo, a self-proclaimed real estate expert, with a plausible reason why the recovery in sales might just be an illusion.

According to Mateo, who has worked with Spanish banks for some years, and should know a thing or two about how they operate, the rising sales figures are just a reflection of the “enormous weakness of Spain’s banks and real estate market.”

Swapsies

The problem is that the official sales figures include what is known in Spain as ‘daciones en pago’, basically debt for property swaps (bank takes the property and cancels the debt). Mateo argues that banks are using swaps to avoid recognising losses they would face in foreclosure and selling at public auction.

The beauty of swaps for banks is they, not the market, get to decide the value of their own property portfolios. “If they were to recognise the real market value of their assets they would be very close to bankruptcy as the market value of their assets is far below the book value of their loans,” claims Mateo, who sees plenty of reasons to suspect the Bank of Spain is complicit in the cover up.

What is worse, banks are also keeping insolvent clients on life support with new loans to avoid having to recognise bad debts, claims Mateo. “The real level of the (banking) system’s bad debts is above 11%, the official rate is 5.5%,” he says. “Recognise real losses would put them (the banks) in a very, very difficult situation.”

Dismal forecast

Mateo forecasts that sales will fall significantly in the near future, thanks in part to end of mortgage interest tax breaks in 2011. Vendors are starting to give ground on asking prices again because “many people realise that if they don’t’ sell in 2010, sales will be much tougher in 2011.”

“House prices and rents will continue falling in the coming years. It’s an unstoppable process,” he concludes.