About an hour car ride outside of Madrid, Spain, is a tiny rural village that just a few years ago had high hopes for an abundant housing market. Yebes is now an example of the economic crisis that has affected the growth of cities. With an excess of 250 row houses, of which only 50 are settled, bad debt has caused these new homes to fall into disrepair with concrete chipping off the buildings, stolen piping, radiators and doors and ghostly empty streets.
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Yebes is hardly unique. The wreckage of Spain’s once booming construction industry is everywhere. And much of it sits as bad debt on the books of Spain’s banks, which once liberally offered financing to developers and homeowners alike. It is still uncertain as to how big a loss the banks are facing. Spain’s economy, the fifth largest in Europe, is much bigger than Ireland’s or Greece’s, and a bailout of its banks could be far more costly, an event that could push the government into default and end up dooming the euro itself.
Unlike American banks, Spanish banks have done little to open their books. Along with other banks in the euro zone, they underwent a stress test last July, and all but five of Spain’s smaller savings banks passed. The Bank of Spain is moving to lift confidence in its banks by forcing them next year to disclose more details about their holdings and to start acknowledging troubled assets faster. But just how much are those assets worth?
Rafael Valderrabano, who founded the Básico real estate company 18 months ago to help banks sell property they are repossessing from developers, says the country is full of situations like Yebes. Right now, he says, he is trying to sell units in 40 apartment blocks near Cuenca, an area southeast of Madrid that is sparsely populated.
Oscar Lorenzo de Amo, 34, is one resident that bought property in Yebes. Once his dream home, he now calls it a nightmare for him and his wife who are trying to sell the house with few prospects. In this area, where guard dogs ward off strangers, few people are willing to move in and struggle to fix the dilapidated homes with broken garage doors, wiring showing on front doors, flaking walls and numerous other inconveniences.
The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments, such as the one in Yebes, sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.
At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.
But almost overnight, the market disappeared. Many immigrants went home. The national unemployment rate shot up to 20 percent. And the northern Europeans stopped buying, too. But government officials now say the worst is over, with housing prices down a modest 12.8 percent from the peak, according to the Bank of Spain.
Fernando Acuña, co-founder of Pisosembargados.com, a Web site that sells housing on behalf of the banks, said as many as 100,000 repossessed units were now for sale in Spain, a number that “could double or triple.”
Still, eager to begin getting some of the property off their balance sheets, some banks have been offering deep discounts and special mortgage rates. Experts say the banks are being slightly more choosy these days about who lend to. But the new loans — almost all of which are at variable rates — could create a second wave of defaults down the road when interest rates rise. Next year may produce a new round of defaults from developers as well. In the early days of the crisis, many banks renegotiated their loans. But experts say many of those deals will expire next year, and without any significant change in the economy, most developers will be no better off.
The tension between banks and developers, once happy accomplices in a booming business, is palpable. Mr. Galindo says that the banks are not lending to developers who have half-built projects and that they are favoring customers who want to buy bank-owned property when giving out mortgages.
The biggest challenge for the banks is that they are likely to end up owners of vast amounts of undeveloped land. José Luis Suárez, an expert on real estate at the IESE business school, said 65 percent of bank lending to developers is tied up in land, enough to build 758,000 more housing units. “That gives you an idea of how long it could take for the market to digest all this,” he said.
via New York Times
