The Pain In Spain Continues– Is It Time To Buy Into This Crisis Market?
I am beginning to feel sorry for the German lawyers we ran into in Madrid. Lawyer HTW lives with his wife (who works part-time, also as lawyer, for a big bank) while raising their toddler son in Munich. Being in the top 5% of German earners means they cannot afford to buy an apartment in a nice neighborhood. The price is 30 years’ worth of rent, with the current cheap mortgage rate not likely to last for long. Under German tax rules, there is no deduction from your income tax for buying a property to live in, only if you buy it to rent it out. So while landlords are favored, common folk are squeezed out of the market.
This explains not only why Germans are so nasty about the greater wealth of Spaniards (83% of whom own their own homes or other real estate when Germans cannot afford to buy). It also explains why Germans are so heavily invested in southern property, which, for them, is more affordable.
HTW is an international tax lawyer trained in Oxford. But taxes are already a big breaking point inside the European so-called Community. HTW says today he would not advise or undertake a real estate purchase in Spain.
But he admits he is tempted. Should you be, too?
Even before the 2007-8 bubble in U.S. real estate burst, Spain had a taste for owning houses bought with hefty mortgages. The pre-crash bubble here was worse than in any other EU country on a per-capital debt basis. Spaniards even today owe 600 billion euro in real estate debt (US$780 billion), and their properties, like those of Americans during our housing burst, are now under water. Moreover, at least 8% of homeowners have lost their jobs. (Spanish overall unemployment is more than 26%.)
But Spaniards cannot even think about turning the keys in to the mortgage banks and moving on. They can be dispossessed and evicted from their homes. But they still owe the bank the money.
Under Spanish law, those unable to pay their mortgage can be evicted from their home or business or office. But the mortgage bill doesn’t disappear, and the evicted still have to pay it off. As a result every building in Madrid wears a sign offering shops, garages, apartments, or office sites for sale, rent, or lease.
In the more depressed south of Spain things are worse than in the capital; here, unemployment is greater than 35%. So the states of Andulusia and the Canary Islands decided to waive evictions for the unemployed poor. For up to three years, homes of poor jobless people owing money to banks or real estate companies will be taken over by the state government. They would only have to pay 25% of their income max in rent, up to 400 euro per month, however much they owe.
Banks and real estate agents holding empty properties for more than six months will be fined. In Andalusia and the Canary Islands, holders of empty houses can be expropriated. The idea is to force the sale of empty homes and make housing more affordable.
Housing purchases are often a multi-generational operation in Spain. Young people starting out in life get help from Mama and Abuela. Sonia, a Spanish physics professor whom we met in Madrid, told us that on her visit from Britain (where she teaches) for the first time this year she saw feeble old grandparents evicted from their own homes because they owed money on the homes they helped their grandchildren buy.
Of course there is a protest movement: signs, demos, and people barricading the doorways of homes from which people are being evicted. But the popular anger has not really changed matters.
One estimate is that half the mortgage properties in Spain are in negative territory, worth less than the money owed on them. But Spanish law is unlikely to stop foreclosures because that would put banks into bankruptcy.
Off the northern tip of the Avenida Castellana, Madrid’s main drag, the Bankia building, which leans toward the boulevard, is symbolic of Spanish property risks.
Spain created a “bad bank,” Bankia, into which municipal credit union and mortgage specialist banks’ bad debt was put. Bankia was spun off on the market two years ago. People who had deposited money with the mortgage and credit union institutions were given shares. Then Bankia was given 41 billion euro of EU bailout money and then had to come back for another 19 billion euro last year after 4 billion euro in losses.
On April 30, 2013, Bankia shares shot up 756%, the day before Spanish markets were to close for May Day. This was the result of a short squeeze, a stock market attack on those who sold Bankia shares they did not own. Its stock rose so it was briefly worth more than the combination of Spain’s largest banks, Santander and Banco Bilbao Vizcaya.
But it is still very fragile, and if Bankia goes bust the whole Spanish banking system is at risk. And every time you drive past its Hq on the Castellana, you wonder if it will tip over.
Given Spanish savings habits and multigenerational help, the default rate is very low, at about 3.5% now. One reason is that people did not borrow 100% of the cost of homes in the bubble, but only about 50% to 60%. But once homes have been repossessed, the banks lose money because they can only get about 35% to 40% of the former price of property rather than the 50% to 60% for the mortgage.
Moreover, defaults are likely to continue to rise until the bad debts are cleared from the system.
One solution being considered is to nationalize the defaulted properties and rent them out to the poor and unemployed. Andalusia is trying that tactic, too, but it is not clear if it will work.
Now the idea of buying into this property mess at a 60% to 65% discount may tempt you. But my German lawyer and my Spanish physicist contacts both warn very strongly against it. If you are in a building shared with people who cannot pay their mortgages being kept on by subsidies and social programs, your property will lose value, too. The level of service and maintenance will fall.
And Sonia warns that anti-foreigner sentiment is rising among the Madrid populace, in part because foreigners owing money can simply leave the country and dump their problems on Spaniards to work out in multi-family Madrid residences. Many foreign owners from Latin America moved to Spain to make money when the going was good. Now they can leave. They cannot be pursued for bad debt under their own laws (in countries like Ecuador) even if they return to Spain.
Being more privileged causes resentment against Latinos. And gringos would be even worse off.
With about 600,000 new homes waiting to be sold for the first time, prices have yet to stabilize. But at least new homes are clear-cut sales without overhanging rights held by prior occupants.
Meantime, banks are busy trying to keep up house prices for their own accounts and for those they have financed. So the bottom hasn’t hit the new home market yet either.
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