Spanish mortgage leader declares real estate industry is bankrupt
In a somewhat shocking and worrying statement a leading Spanish lender has declared the country’s real estate sector is ‘bankrupt’.
According to Santos Gonzalez Sanchez, president of the Spanish Mortgage Association who speaks on behalf of the country’s mortgage lenders, there is so much debt in the industry that finance for property development has effectively dried up.
‘The real estate sector is bankrupt,’ he said, pointing out that Spanish developers had a combined debt of €324 billion in the third quarter of 2009, the equivalent of around 30% of Spanish GDP, according to figures from the Bank of Spain. The interest bill alone is around €15 billion a year.
More than 50% of the debt was used to buy land for which there is now no market. ‘Whilst those plots of land are not properly valued, the financial system can’t start afresh and won’t be able to finance new homes,’ Gonzalez told the Spanish press.
‘The viability of the property sector is in question and it is putting the financial sector in danger,’ he warned.
Gonzalez added that something drastic needs to be done. He said that the Government or the Bank of Spain needs to take a lead in tackling the problem instead of ‘looking the other way’.
Some experts believe that Spain needs to create a ‘bad bank’ where all the toxic real estate loans can be dumped, freeing the banks from their bad debts and enabling them to start lending again.
Gonzalez also warned that the situation has wider implications as the situation with the developers is pushing up the cost of credit for the whole Spanish economy. ‘The developers’ debts affect the credit ratings of the financial institutions, with all the consequences that has for a sector that still hasn’t fully recovered its liquidity. The financial system will have to explain how long it can bear this situation,’ he added.
Experts are also warning that Spanish banks may have to deal with a tidal wave of repossessions this year, with big implications for the property market. The auctions banks normally use to dispose of repossessions are struggling to attract buyers, as the credit crunch has hit even the opportunists who traditionally bought at auction.
Spain’s General Judicial Council forecasts 180,000 foreclosures this year, up from 114,958 last year. With few buyers at auction, banks will have to take back the properties onto their books at the write-off price of 50% of valuation, which implies recognising a loss. That could have big implications for the banks and the property sector in general.
The big question is what impact this new batch of repossession, the equivalent of 15% to 20% of the current inventory of property for sale, will have on the market. These properties could end up dumped on the market at write off values that will send prices down.