Spain’s mortgage market continues its decline with lending for dwellings only 14% of five years ago

The last few weeks have seen Euro area summit inflation rise to new levels. Not only has summit after summit failed to agree the next stage of the bailout for Greece but now we see that the latest summit was unable to agree on the overall European Union budget too. This gives the image of government by paralysis which these days seems to be increasingly common as if we look at the so-called fiscal cliff in the United States  we see a similar theme.

However these delays do have consequences if we move from the refined and expensive air of these summits-  the wine was reported  at £120 per bottle- to the real economy. In Greece how can anyone be expected to plan ahead in her economy when everything is so uncertain? The latest payout started at 31 billion Euros and is now 44 billion Euros. You might think that there is some hope in her getting this amount of cash but hopes start to get dashed when you see that around 24 billion is for the recapitalisation of her banks. Yes yet again most of it goes to the banks.

But returning to economic matters I feel that factors such as expectations and confidence have played a powerful role in why the credit crunch has gone on and on and may yet see a further lurch downwards. Economies simply cannot run on a timescale that at the moment focuses on the next Greek debt maturity on the 14th of December.

Also what one might call an anti-triumph one piece of good news is now bad news. The Greek government bond market has been rallying recently and her ten-year bond yield is now around 16.5%. Now consider that a bond-buyback is being considered and you see the problem. Now that prices have risen -mostly due to the leaks about such a buyback- Greece will have to pay more and yet again we will have the ugly sight of speculators profiting from official intervention which is operated incompetently.

Euro area economies

We are seeing more and more signs of weakness and today in the Euro area we have seen more of what feels like  a very long-running theme and also more of a relatively recent one.

Spain’s mortgage market

This is a matter at the frontline of the Spanish crisis as it was the housing boom that turned to bust which affected her construction sector and her banks severely and then rippled out into the rest of her economy. Unfortunately the Spanish system of deferring many of the problems from this for her banks means that the effects are on-going as in the end they catch-up and we see more signs of this in her latest mortgage numbers.

The average amount of mortgages in September presents an annual fall of 8.0% and amounted to 109,503 euros

The value of mortgages on urban property is 3.631 million euros, representing an annual decline of 35.7%. In homes, borrowed capital exceeds 2,170 million euros, 37.1% less

So we see that if mortgages are any guide house prices in Spain are still falling and on a year on year basis are falling at a substantial rate. Also we see that in volume or quantity terms we are still seeing very large year on year falls in mortgage lending. Indeed we can see the scale of the problem by looking at mortgage lending for dwellings over the past few Septembers in reverse order from 2012 going back to 2007.

2.17 billion Euros; 3.45 billion Euros; 6.35 billion Euros; 7.37 billion Euros; 8.9 billion Euros and 15.4 billion Euros

Whilst the 15.4 billion lending figure in September 2007 was a product of the boom and accordingly in itself cannot be used as a benchmark we see that we have veered to the other extreme now. Compared to the same month in September 2007 we see that mortgage lending for dwellings in September 2012 was 14% of the total then.

So it would appear that for all the claims of the opposite the Spanish mortgage and banking system looks to be still in trouble and is getting worse. If we look for more evidence of this we see that the savings banks or cajas appear to have retrenched even further and the emphasis is mine.

Banks are the institutions that granted greater number of mortgage loans during September (77.2% of total). Savings banks granted 9.1% and Other financial institutions 13.7%

So they are providing a smaller percentage of a much smaller amount. Not much sign of health there! Also their existing loan book must be increasingly underwater. We do not get a breakdown by sub-sectors but we did learn from the Bank of Spain a week ago that provisioning against doubtful loans reached 182.2 billion Euros in September which is up from August’s 178.6 billion. So far in 2012 bank loan books have shrunk by just under 4% whilst doubtful loans have risen by just under 27%. As you read that I suspect that it is not only my imagination which is thinking that the situation at the cajas is probably much worse than that. Something to recall when the bailout of the Spanish banks is announced and claimed to be a smaller amount than expected. A “surprise” will then be along sooner or later with the former more likely than the latter.

Also in an era of supposed ZIRP (Zero Interest Rate Policy) I did wonder about this in the mortgage statistics.

In the case of housing, the average interest rate is 4.12%, the lowest since June 2011

Borrowers will welcome any fall but 4.12% seems a long way from ZIRP and the 0.75% borrowing rate that Spanish banks can get at the ECB does it not? Another hidden subsidy…


This morning we have seen more signs of the economic slowdown which is encircling Italy.

In November, the confidence climate index decreased from 86.2 to 84.8.

Care is needed with the headline as by mistake someone at Istat has put this as an increase. If only! Also if we look at the detail the bad news just keeps coming.

The decrease was notably explained by economic and future climate, that fell from 71.5 to 69.4 and from 78.2 to 75.2.

The balance concerning expectations on unemployment increased from 108 to 114.

As you can see the present climate is not very nice, the future is expected to be worse and the implication of that is higher expected unemployment. As the starting point is now an unemployment rate of 10.8% (September 2012) that has moved higher in 2012 from December 2011′s 9.4% so far we see that Italy is weakening.


So as we go forwards we see that on two of the frontlines of the Euro area crisis there is trouble afoot. Spain has a mortgage market which has been travelling downwards faster than Felix Baumgartner and this is a clear counterpoint to all the official claims about the health of her banking system. Whereas Italy is seeing a more general decline with number after number in 2012 pointing downwards.

Thus I tend to feel that the Euro area is currently in the eye of the storm where it is suddenly eerily quiet but it will soon pass over us and the storm will be back. Because there is delay after delay the problems are always faced when the area is weaker. Can kicking only works if the future is brighter when it is not it fails and that is what it is doing right now. If you are looking for a taste of this in the sporting arena then be an English rugby fan!

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  • Drf

    Is there still anyone with a brain who does not yet recognise The Great Depression II ?

  • Anonymous

    It’s like the phoney war – with many potential crisises poised to break. The US fiscal cliff, US and UK inflationary episodes, a coup d’etat or a Fascist government elected in Greece, a Spanish bank crisis, a Eurozone membership incident by Spain, Greece and/or others, German political heads rolling as the losses on Greek bailouts hit the German budget. etc.

    maybe a controlled breakup of the euro is the least worst option.

  • Anonymous

    Grexit for Christmas? Even more reasons this year for your idea of a Grexit over the Christmas break maybe Shaun …….

  • Rods

    Hi Shaun,

    Another interesting article.

    “Thus I tend to feel that the Euro area is currently in the eye of the storm where it is suddenly eerily quiet but it will soon pass over us and the storm will be back.”

    Well put.

    If the Greek crisis makes it through to next year through the throwing of €44bn of more good money after the bad, or by more financial engineering by the ECB, then it must all come to ahead in early 2013. As it is an election year next year in Germany, with Greek debt rapidly heading towards 200%, when it is going to start dawning on the countries lending the money that they are never going to get it back? With Spain’s economy still getting worst, potential Catalan separation, things don’t look good for Spain in 2013. In Greece and Spain, how long will the 25%+ unemployed and 50%+ youth unemployed put up with it with no hope of economic growth on the horizon. Especially, with a European slowdown, migration of the unemployed young to jobs in the UK and Germany cannot go on forever.

    EU budget are like a communal bill at a restaurant, everybody wants to gorge themselves on the expectation of somebody else picking up the majority of the bill. So the net recipients want more and the net payers want to pay less, except for slippery France that is try to gain advantage by running with the foxes as well as running with the hounds. I will stock up on pop corn ready for the next summit in 2013.

    There is a potential toxic political mix when it comes to sorting the US fiscal cliff, there maybe quite a sharp fiscal downturn in the US for the first and maybe the second quarters as this bites until some sort of political and economic compromise is found. Low energy prices from shale oil and gas will rescue the US over the longer term.

    I think the US fiscal cliff, Euro can kicking, missed UK deficit targets and Middle Eastern unrest along with the Iran question is going to make 2013, potentially a very dangerous year, politically, economically and militarily.

    So, once we have gone through the eye back into the ever stronger head winds of a deepening European depression, the US fiscal cliff and Middle Eastern problems we will be in into the 2013 global perfect economic and political storm!

  • Andy Zarse

    Hi Shaun, I am currently in The Netherlands Antilles, in Curacao to be precise, where the nasty blue cocktail comes from. As you can imagine, its terrible…

    My Dutch wife is doing some work for a couple of the large pension funds over here. I had an interesting chat with one of the senior bods at a local bank on friday, in a nutshell they pretty much face the same problems as the developed world.

    However, the interesting thing here is how they have approached the problems. Firstly, although not independent of the Netherlands, the Dutch islands (also St Maarten) have their own little central bank and have retained the Netherlands Antillies Guilder rather than to take the easy option and go for the Euro. I think the NAFL is pegged to the USD and they can set their own interest rates, but nonetheless they have been quite clever in managing their economy. There is a moderate and sensible amount of construction but without spoiling the place, they have some oil and gas and vaguely upmarket tourism (i.e. a few steps up from “pint and a fight week” in Falaraki). They encourage outside investment and have a decent legal system. Cost of living is perfectly reasonable and they have a moderate outlook on life (even getting the clamp removed for accidentally parking illegally only cost £9!).

    I can’t help thinking that some of the other tourist based economies in Europe, – who in the last decade have spent the next thirty years money – could learn some very important lessons. And I reckon any of the euroarea would kill for the Antillian growth rate of around 4%pa!

    Anyway, tot zeens, I’m off for a dip, someone said the weather’s not too clever at home…

  • pavlaki

    I am still in Portugal and keeping an ear to the ground and an eye open for the ‘real’ economy. Every where I go it appears to be ‘flat’ with very little happening. The estate agents who are still in business report very few house sales at all and as a result have no real idea of what has happened to the property market other than ‘it is substantially down’. Bankers say that business (all business) is very quite indeed and I see very little sign of any activity on my travels. In the low season for tourism, not much happens on the economic front either. I do not see any evidence of where Portugal is going to achieve any growth or income other than tourism and agriculture – and that needs a cheaper Euro to give it a boost. Many hotels are closing as they previously relied upon Portuguese tourists or Spanish tourists in the low season when the Brits stay at home. This ‘local’ tourism has virtually dried up. One thing that I have noticed is that Portugal has been more proactive in reducing prices in hotels and restaurants to try to win business. Greece and Spain take note!

    All in all I would sum it up as follows: ‘Once upon a time in Portugal, not much happened’.

  • DaveS

    It ain’t over until the ECB fat lady prints,

    World leaders aren’t going to allow a Euro breakup because it means a hard default of Europe, and in the ensuing depression maybe even the USA (who are bankrupt anyway). They have no way of knowing if we would emerge from the crisis and what the world might look like if we did. Its the post-Lehmans abyss they peered into that scared them to death – remember Hank Paulson’s thousand yard stare…..

    The Germans are just desperately trying to put some limits in place before they are forced to monetise the ever growing welfare state deficits of the rest of Europe. Not sure they will succeed but can’t blame them for trying. Ultimately they will drown with their European suicide “partners”.

    There is an argument for a Grexit warning. Its risky but the idea of making an example must be tempting. The ECB have the printing press firewall in place now so its not impossible. But I doubt they will play dominoes when they can just pay off the Greek debts (which are owned by them via the ECB after all).

    And if this blog is correct then Greece might after some time, set an example of how life is better outside the Euro – that might really drown the Germans.

  • forbin

    Hello DaveS,

    I think the main issue is that the Germans are being expected to pay for it all , well the most of it. I dont think they can- theres too much debt

    again its what to do with all that debt – France would like to print it away , so would others . So I see a lot of shenanigans going on to blindside the German public next year – until after Merkel gets in , then the fun begins!

    Pop corn at the ready


    PS: I also think Greece is a side show to Spain France and Italy…… and the UK of course ;-)

  • Andy Zarse

    The likening of the Spanish economy to Felix Baumgartner is quite right. However the bit that most frightened me about his frankly insane jump wasn’t the speed of his decent, it was when he went spiralling out of control. Clearly Felix knew what he was about and managed to straighten things out. I have no such confidence in those guiding the frankly insane EZ…

  • Anonymous

    Hi Shaun,

    A few personal observations on the Spanish property ‘market’.

    In a rising market when times are good, costs tend to be ignored. When times aren’t good things look very different and as such have a big impact on the market.

    So when you look at the Spanish property market its worth bearing in mind how much the infrastructure gets in the way of the market finding a rational bottom. For example you have:-

    The authorities cannot officially comprehend anyone selling a property for less than it was bought for – so the sale is obviously fraudulent (think the traditional stuffed brown envelopes) and so tax has to be paid by the buyers on the loss! This despite the Title document (Escritura) spells out the source of money, transferred by which bank, total payments and taxes etc).
    Total cost of purchase for the purchasers used to be 10%, now its probably around 15 – 16% (depending on the loss)! A real encouragement for people to buy.

    ‘plus valia’, a tax by the local authority on the increase in value of the property since it was bought – this only ever increases by an amount that the authority makes up but should reflect the increase in the value of the ground.

    Of course the Hacienda (tax authority) will also ‘keep’ 6% of the purchase price to contribute towards the capital Gains tax that will have to be paid on ‘profits’. Trying to get a claim processed requires a solicitor and a deal of patience. Maybe the treasury has no money, or something.

    Then, what do you do with the proceeds? Electronic transfer? Option not available and it would remove the dubious fun of having to count all the notes.
    Solicitors and estate agents only deal in cash. Take the bag of cash and try to deposit it in a bank, fighting the money laundering rules (in Spain, I ask you)? Take ‘the large amount’ as a bank cheque (plus cash for doling out to agents etc), signed by a director? To deposit that into your euro account is going to cost you around 0.5%.

    All in all, plenty of property transaction disincentive which hits confidence as much as the sliding valuations. A Market stabilisation anyone?

  • Shaun Richards

    Hi RobH

    They just continue to build and build and if they also closed Christmas Eve there would be a five day break to organise matters….
    Would have been much better of course to have done it last christmas.

  • Shaun Richards

    Hi Andy
    You are right above the weather which in London has gone rain,rain rain although probably thanks to the Thames Barrier my feet are not wet as I type this! However the West Country has been affected more severely…
    I can add one extra to your Dutch Antilles story which is that in the past I have had dealings with funds based there so it is one of the offshore centres. I have always presumd there is business based on this there but am no expert.

  • Shaun Richards

    Thanks for the update. I can help a little with some details on Portugal’s housing/mortgage market.

    “The average value of housing bank appraisals in Portugal stood at €1026/sq meter in October, decreasing 0.1% from the value observed in the previous month and 6.1% from October 2011 ”
    Hard times indeed and I fear for her even more with the extra austerity planned for 2013.

  • Shaun Richards

    Hi DLinneridge
    That all sounds extraordinary so there is no electronic monetary transfer system like the CHAPS one used in the UK for such things? Using cash makes it look/sound very dodgy.
    I think that I am goping to have to read the taxes bit a couple of times to get a grip on it…..

  • Anonymous

    A little more detail from my slightly cynical viewpoint.

    When a property transaction actually takes place it will be in the notary’s office – he is the government tax collector who overseas the fact. Neither buyer or seller has any relationship with him/her.

    Also present will be the seller, his solicitor (if he uses one), selling agents (probably multiples), the buyer(s), possibly 3 people from a bank offering a mortgage (in my transaction), his solicitor, and a translator acceptable to the notary if any principle is non Spanish speaking. The translator is required as the whole contract is read to the whole packed room, in multiple languages. I produced my own completion statement for the day, with some effort, taking account of the cash needed by my agents and solicitors. Dont book anything else for this day.

    If you google Spanish solicitors (and Spanish solicitors are not comparable to UK ones) and the advisability of giving them sums of money, you soon see why things happen this way. So to make sure that all the funds arrive at the correct place a cheque or 2 is produced for the bulk of the transaction, with bundles of cash for divi-ing up (assumes a mortgage is needed) – when you include utilities the actual settlement sum is negotiated at the table!. In the ‘good old days’ of rising prices, the notary would leave the room whilst boxes of cash were distributed, thus reducing the official recorded sale price, but this has now largely stopped, I’m told,

    So there is no one person who holds funds who could arrange a bank transfer – there is such a thing, but in this scenario? And the receiving bank charges their cut of electronic transfers, debit or credit, as well (try getting a ‘price list’ from a bank based in Spain).

    SEPA transfers are also available for smaller amounts.

    So its guaranteed to look dodgy to a UK view. Speaking to the FX companies on funds repatriation, they appear unable/unwilling to accept an electronic transfer from a Spanish Notary, the central character in this, though I understand from a French one this could be made to work.

    I had to go through the taxes bit more than a couple of times …… Seems to increase the taxes paid but helps to reduce the number of transactions, possibly a lot.
    If you were a (the?) Spanish couple looking to buy a first home you need to find enough cash to pay the deposit and maybe a total of 15, 16, 17% of the sale price when you include the extra tax for the price reduction!
    Oh yes, nearly forgot. To continue a theme, the transaction tax has been halved for new houses, now largely owned by the banks. And increased tax for resales, largely privtely owned. Thats bank bailout v austerity in action.

  • pavlaki

    The problem with the value of Portuguese properties is a bit like Spain – the folk doing the valuation have a vested interest in keeping the values up!

  • Anonymous

    this crisis won’t be fixed by massive printing of euro. simply put a currency union of hard working tax compliant northerners and systematic tax avoiding club med countries is doomed to failure.

    There is also an argument for Germexit – yes Germany would be saddled with huge euro debts, but they might find devalued euro debts easily affordable with a new hard currency DMark.

  • DaveS

    Agreed – the crisis won’t be fixed by printing – there isn’t a fix.

    Europeans (including us) will be poorer one way or another.

    I believe Europe will soft default via inflation – politicians and central bankers and the wealthy will always choose this route.

    The question is whether we maintain social cohesion during the default and whether we can recover our lifestyles afterwards. I doubt we can – I think we are witnessing a fundamental shift in wealth of the West.

  • Anonymous

    Spanish domestic mortgages are based on Euribor. They were very inexpensive for a long time but as you say, are now a hidden subsidy to the banks. That has not gone down well among mortgagees, especially as many of the more recent ones are in negative equity. Plus the cajas in particular are a disaster that is still not entirely visible due to the 6 year rule for provisions, but that will come to an end soon. Very large numbers are involved.

    And from the point of view of the banks, the suspension for 2 years of mortgage-related evictions that was announced last week is going to be expensive. Those who can’t pay will not be evicted for the moment. Until recently the houses of the 350,000 evicted in recent years were sold at sometime absurdly low prices by the banks to recover at least some of the debt, the balance of which remained with the householders. Now they will have to start again in 2 years’ time, a process that I predict will be just as unacceptable then as it is now. I wonder how the banks will treat that situation in their accounts? My guess is that it will be ignored for another 6 years. Brussels needs to get to grips with individual country banking rules, and impose a uniform and reasonably rigorous set throughout the EU.

  • Anonymous

    Just like the UK, then!

  • Anonymous

    Of course there is, I use it regularly.

  • Anonymous

    You haven’t mentioned that ‘portador’ (bearer) cheques are sill in use in Spain. Depending on your viewpoint, they can be quite useful. This is another thing the EU needs to stamp out, in my opinion. It simply facilitates tax evasion.

  • Anonymous

    One very big problem for Spain and Portugal is the devaluation of Sterling in 2008. That raised EZ prices by around 30%, now down to perhaps 20%. So what to do? UK tourists were the largest slice of the market. Cut prices? You can only do that for all visitors, and many were not affected. Reduce quality? Offer special low cost restaurant meals for the impoverished from the UK? Grin and bear it? Still, at least those in the EZ have seen little change in prices. Germans and French are to be seen in larger numbers in Spain these days.