Mortgage Drought in Spain: Who is to Blame and What to Do?

Mortgage Drought in Spain: Who is to Blame and What to Do?

Advertisement of Donpiso, a Spanish broker company, assures that it can sell a house within 60 days.  Juan Luis Nolasco who runs one of the firm’s Madrid branches says that it is possible only if owners are realistic about prices and the buyers are lucky to avoid problems concerning getting mortgages.

“The biggest problem is lack of access to financing,” Nolasco said with sorrow and added that it could take about six months or more to sell a property.

Buying a house hasn’t got any easier for Spaniards, even after house prices increased by as much as 40%. It is increasingly difficult for Spanish families to own their own home because of rising mortgage rates, currently more than one-and-a-half times higher thann Germany, the end of mortgage tax breaks, and shrinking disposable incomes. Fewer than 15,000 mortgages were granted in September this year that cannot be even compared with about 129,000 credits, the peak index of September 2005. 

The collapse of a decade-long property boom, when mortgage lending surged almost four-fold, pushed Spain’s economy into a five-year slump and forced banks to take impairment charges of €87 billion to help clean up soured assets linked to real estate.

Mortgage pricing 

The average rate on a mortgage with a term of more than 10 years was 5.19 % in October 2013 even as 12-month Euribor, the benchmark used to price most Spanish home loans, has dropped by as low as 0.51%. These data are presented by the Bank of Spain. The same mortgage in Germany would cost 3.14%, 3.19% in France and 4.77% in Italy.

Taking into account that the Prime Minister Mariano Rajoy canceled tax deductions for home acquisitions at the end of 2012, the total cost of buying a home with a mortgage is now higher than in 2008.

Rational Buyer 

“The irresponsible buyer who bought at the top of the market is paying less than the rational buyer who’s in the market now -- it’s madness,” said Juan David Garcia, a structured finance analyst at Fitch in Madrid. Judging by his words the Spanish market is still far from balance.  

Loans are not just getting scarcer, they are also getting smaller. As the number of residential mortgages fell by an annual 31% in September, the average loan was €97,298, down 5.5% from a year earlier and 36% from a peak of €152,482 in 2007. 

“The few mortgage loans that banks are granting are getting smaller and smaller,” said Beatriz Toribio, head of research at fotocasa.es. She is sure that without financing there won’t be a recovery, however many prices fall.

Rate of Unemployment

Unemployment rate in Spain is 26% and the economy is barely growing. Banks are very cautious about who they lend to and pay much attention to the control of prospective borrowers.

They’re also charging more for mortgages to compensate for the increased risk. The fact that yields on Spain’s €583 billion of home loans have plunged with the decline in Euribor - it also adds fuel to the fire. Banks are now being more stringent in analyzing the ability of mortgage borrowers to repay if Euribor increases again. 

 

Moody’s Report

While Moody’s Investors Service yesterday increased Spain’s credit rating outlook to stable from negative citing improving growth prospects, many people in the country aren’t necessarily seeing the benefits. Missed payments on mortgages in Spain are still rising. The International Monetary Fund predicts that unemployment will not fall below 25 % until 2018. 

Banco Santander, Spain’s biggest bank, stated in October that 7 % of its mortgage loans were in default, up from 3.1% in June.

“The credit drought minimize activeness of homebuyers, moreover, we can’t talk with any certainty about a recovery in the economy”, said Eloy Bohua, managing director of Planner Exhibitions, the company that organizes the annual Madrid International Real Estate Exhibition.

Taxes

Tax changes are also reducing home affordability. At the end of 2012, the Provision of mortgage tax deduction that allowed Spaniards to reduce tax payments was canceled.  Deductions could run up to €9,000 lifting the burden off Spanish taxpayers’ heart.

At the same time, levies on property transfers have been raising as cash-strapped regional governments take advantage of their ability to set stamp-duty rates. The government also has raised value-added tax on purchases of new homes to 10% from 4%.

A Spaniard buying a US$150,000 home would, on average, have to pay taxes and fees of US$10,500, or 7% of the property’s price that is the second largest sum of such payments after India.

Big Money 

Spanish households’ average income fell for the fourth year to €23,123  per year in 2012, compared with €25,556 at the start of the crisis in 2008. 22% of the population is below the poverty threshold now. 

Economic conditions in Spain have left the market wide open for cash buyers who don’t need mortgages and can negotiate discounts with sellers for quick sales. Cash deals now account for 70% of home purchases in Spain. Despite sales fell 9.2% in September from the same month a year earlier

Most buyers of property in prestigious districts of Madrid such as La Moraleja and Conde de Orgaz have enough money and they don’t need credit. It is not a surprise that sales are up by 20% this year.

Hope for Banks Only?

Gonzalez Sanchez of Spain’s mortgage association said banks may start to begin easing home-loan terms next year, though 2014 will also be weak in terms of lending volumes.

“Banks won’t operate in normal way until they solve this problem with property market,” he said. “Spain still needs to sell homes.” 

Text: Kirill Ozerov, adapted from bloomberg.com