Three Million Unsold Properties In Spain?

Yes, up to three million. That was the conclusion reached in the 2009 annual report on the Spanish property market prepared by Madrid-based real estate analysts R. R. de Acuña & Asociados. The report is described by Sunday Times Spanish Property Doctor columnist Mark Stucklin as one of the most influential annual reports on the sector, so the conclusions are hardly to be sneezed at, indeed the assumptions made in the calculations appear on the surface to be entirely plausible. In fact, having read the summary of the report in this article here, Variant Perception’s Jonthan Tepper wrote to me to ask whether I thought we were being “dire enough”. Yep. Sufficient unto the day is the direness thereof.

So where does the 3 million number come from? Well, according to the estimates of R. R. de Acu̱a & Asociados Рas outlined in the Expansion article Рthere are currently 1.67 millon flats and houses on the market and looking for a buyer in Spain. Roughly 1.1 million of these are new, while a further 518,000 second hand residential properties are now estimated to be languishing on the market. To this number we then need to add the 327,350 properties under construction but still unfinished Рthese will either need to be completed or knocked down, but in either case they represent a problem.

Finally we come to the 1.098 millon housing units for which planning permision has already been granted together with an allocated credit line of 52.947 billion euros courtesy of the Spanish banking sector. Of course maybe may say, well these properties will never be buit, and this may be true, but deciding whether or not to build them is a much more difficult decision to take than it seems, since any such decision would be equivalent to throwing the towel in on Spain’s construction industry, and would constitute an implicit recognition that the policy pursued so far by the Zapatero administration of trying to soldier on through to 2011 had been a failure. Construction activity is still only down some 30% from peak, and if we think it will need to fall from nearly 12% of GDP to around 4% then it still has at least another third (or fifty percent of current output) to come down, and this is where all the issues start.

Deciding not to go ahead with these houses would basically mean very little construction activity in Spain during the next couple of years or more. Evidently this would push up unemployment even further, and here is where the problem comes, since this deterioration in the general economic situation would make it even harder for the property market to recover.

Any kind of bubble like the one we have had requires that everything feeds on itself, the moment this stops happening everything starts to deflate, and this is what is happening now. Simply not building – which I obviously think is what they have to decide – would mean another vicious twist in the screw, more construction company bankruptcies, and hence more bad loans for the banks.

Faced with this, and crazy as it seems, there is a certain logic in continuing to fund zombie builders to build houses that evidently no one needs, since money is cheap from the ECB, and this way the bad-loan book looks, well if not good, at least not so bad. And who knows – so the thinking goes – maybe one day we will find a use for all these houses. And this is where the pre-funding issue comes in, since the builders have had to demonstrate in order to get the permission that they have the financial resources to see the projects through, and the banks accordingly have had to set aside the 50 billion euros or so in anticipation of this, which is why, as Madrid University Professor Daniel Villaba pointed out earlier in the year, keeping funding the zombie builders means effectively starving Spain’s Pymes (or small businesses) of much needed working capital. But the banks can’t simply tell the builders to go to hell, and not to build, since if they do the builders will declare themselves insolvent, with the evident consequences that that much cultivated non-Performing Loans rate would suddenly shoot up.

So adding everything up, we find that between them Spanish estate agents, banks, savings banks and private investors are now either owning or holding the tab on a grand total of something like 3.1 million properties, all of them looking for, or about to be looking for, that ever so elusive thing in Spain, the potential homebuyer.

Another interesting conclusion is that 75% of existing builders will simply go out of business in the next five years – since which everway you look at it, building now or building later – Spain’s construction sector is hopelessly overpopulated.

Fortunately Mark Stucklin has – on his Spanish property buff blog – given us what he calls a a “bulleted summary” of the main points in the report, and these I reproduce below. To his summary I would only add two further points of my own.

Firstly the estimate of 25% unemployment by the end of next year contained in the report may well be on the low side, especially if the Spanish government is running out of funding for the stimulus programmes. Spanish INEM employment department officials have already leaked estimates that if the Plan E type projects are not renewed, then we could see something like 700,000 additional unemployed in October and November of this year alone. If these warnings turn out to be realistic then my feeling is that we will hit 25% unemployment around Easter, and then start heading up towards 30%. We should break through the 30% level around the turn of 2010/11 or by the spring of 2011, depending on a lot of factors which are still hard to see at this point. And where will we stop? No idea at all, since this simply depends on when the Spanish citizenry decide they have had enough and a package of emergency measures are put in place. It is hard, given the way the eurosystem works, to see how a “short sharp shock” may be administered, but something of the kind will be needed, or the patient will simply arrive moribund on the operating table.

My second observation is merely anecdotal, but the Acuña & Asociados report places a lot of emphasis on the coastal situation, which has, to some extent, already been “factored in” by most participants, however quite by chance I have talked with a number of people in recent days who have stressed with me just how serious the situation is in the satellite towns around Madrid, built as they have been for Ecuadorians who never arrived, or Romanians who have already left. I think this element is yet awaiting a proper accounting, and the cost is unlikely to be small.

Summary by Mark Stucklin of R. R. de Acuña & Asociados 2009 Annual Report On The Spanish Property Market

– “There are no green shoots around here,” said Fernando Rodríguez y Rodríguez de Acuña, president of the company, describing the state of the Spanish property market during a press conference introducing the report.

– At end of 2008 the supply of property for sale or under construction was 1,623,042, of which roughly 580,000 were resales, 500,000 newly built but unsold, and 470,000 under construction and nearing completion.

– Annual demand estimated as follows: 233,000 in 2008, and 218,000 in 2009.

– That means there are some 1,6 million homes on the market, whilst demand in the next few years is expected to run at around 220,000 homes. At current levels of demand it will take 6 to 7 years for the real estate sector to recover. So it could take until 2016 for the market to digest the current property glut.

– Looking at the market for holiday homes on the coast, local demand was estimated at 42,000 in 2008, expected to fall to 40,000 in 2009, whilst foreign demand for holiday homes on the coast was 21,000 in 2008, falling to 20,000 in 2009.

– The report singles out the coast as one of the areas with the biggest glut of property, and therefore the biggest problem that will take the longest to resolve.

– Higher priced market segments are also a problem; more expensive market segments are expected to take more than 6 years to clear, compared to 3 years or less at the cheaper end.

– The only way developers and banks will get rid of the glut of property in the medium term is selling at a loss.

– After falling 1.83% in 2008, overall prices will fall 9.55% in 2009, 9.32% in 2010, and 4.81% in 2011, a cumulative fall of just under 25.5% in nominal terms.

– After falling 3.32% in 2008, coastal prices will fall 11.28% in 2009, 7.98% in 2010, and 4.31% in 2011, a cumulative fall of 27% in nominal terms.

– Housing starts will fall to between 50,000 and 75,000 a year in the next few years, down from more than 700,000 in 2005. “The market situation doesn’t justify more building, and anyway the banks won’t lend money to build something that won’t sell,” said Fernando Rodríguez y Rodríguez de Acuña.

– Thanks to long lead times in the construction business, the full economic impact of the collapse in residential construction is yet to be felt. The darkest hour for the Spanish economy will come in the second half of 2010, when unemployment could reach 25%.

– Developers will go out of business in greatest numbers during 2010 and 2011. “It gets increasingly harder for developers to refinance with assets they either can’t sell or which are already mortgaged, and are increasingly devalued,” said Fernando Rodríguez y Rodríguez de Acuña, who predicts that 75% of developers will be wiped out in the next 5 years by a combination of too much debt, the market slump, and “bad management”.

– Recovery won’t come until 2013, by which time the sector will be just half the size it used to be, if that.

This entry was posted in A Fistful Of Euros, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

27 thoughts on “Three Million Unsold Properties In Spain?

  1. Pingback: Humble Money » Blog Archive » links for 2009-09-21

  2. Well… if spain could find employment for them outside the construction sector, another few rounds of “grant amnesty to resident illigal aliens with employment” would clear up the housing glut right damm quick. – Or to put it another way, the real problem is that housing construction is just too big a chunk of the total spanish economy, and spain needs to grow other bits of their economy. A lot.

  3. I’m a Spaniard from Madrid…
    25,5% cumulative fall in 4 years and 30% unemploiment.. This country in crazy!!
    Please, help us!!
    Don’t give us the Olympic Games!!
    It will just help politicians to get even richer!!

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  5. “Whatsmore, the 1.098 million with planning permission have already been allocated a credit line of 52.947 billion euros by the Spanish banking sector.”

    I wonder about the calculations. Everyone knows that a big problem of the US housing market is, that borrowers can just walk away if they are in negative equity (value of the house < value of the loan). For every borrower that has not yet started to build a house, it is reasonable to not to take out the loan and start building a house but to buy one on the market (at huge discounts).

  6. “together with the 1.098 millon for which planning permision has been granted and which now have two years – by law – to be completed”

    I may be missing something obvious here, but would it not be a good idea to change that law?

  7. Hi Chris:

    “I may be missing something obvious here, but would it not be a good idea to change that law?”

    Firstly, I may have been oversimplifying, the strict law is once you start building, and what may simply happen if they don’t start to build is that the planning permission expires, and some kind of penalty clause is activated, sending everyone back to go, from where they have to start all over again, and although this would incur costs, they would – on the surface – be a lot smaller than building another million buildings.

    However…

    Deciding not to build is a much more difficult decision to take than it seems, since it would be equivalent to throwing the towel in on construction – which has to be done, but is a much harder decision than simply changing a law, or whatever.

    Deciding not to go ahead with these houses would basically mean very little construction activity in Spain during the next couple of years or more. Evidently this would push up unemployment even further, and here is where the problem comes, since this deterioration in the general economic situation would make it even harder for the property market to recover.

    Any kind of bubble like the one we have had requires that everything feeds on itself, the moment this stops happening everything starts to deflate, and this is what is happening now. Simply not building – which I obviously think is what they have to decide – would mean another vicious twist in the screw, more construction company bankruptcies, and hence more bad loans for the banks.

    Faced with this, and crazy as it seems, there is a certain logic in continuing to fund zombie builders to build houses that evidently no one needs, since money is cheap from the ECB, and this way the bad-loan book looks, well if not good, at least not so bad. And who knows – so the thinking goes – maybe one day we will find a use for all these houses.

  8. Oliver,

    “Do you want to help owners of real estate or construction workers?”

    Neither. I want to get the Spanish economy creating real employment again. This is the only way to escape the whirpool logic. Both construction workers and real estate owners will have a hard time of it in the short term, and there isn’t much to be done about that.

  9. Oliver,

    “Hello, as you are keen on demographic impacts, will you tell us how this affects migration?”

    Essentially, if it is obvious that if you have to have a hard time either now or later, those in the South of Europe will normally go for the second option, while the Germans sometimes choose the first one.

    The one million unbuilt properties only serves to dramatise the situation, like the children who weren’t born to live in them due to the low fertility, the issue is, what will all the people who were programmed to build them (and those who would work in the bars and restaurants and car factories where they were going to spend their money) now going to do?

    This is why we need to urgently build export oriented factories, to soak up the millions who are now left without gainful employment.

    Population is undoubtedly the greatest downside risk for Spain in the mid term. Who would have imagined in 2000 that Spain’s population could have gone from 40 to 46 million by 2008 (I could, not the exact numbers, but the general idea, this is what global macro is about) and who could imagine now that if we don’t start to soak up the surplus labour now in new export driven jobs, then by 2015 we could be back down to 40 million again? I can.

    The biggest risk to the Spanish economy comes from an eventual recovery elsewhere in Europe (higher interest rates, and jobs available elsewhere) BEFORE Spain has done anything to correct its problems. Labour markets elswhere would become large magnets for people sitting around idle in Spain.

    Under such a population flight scenario, the property wouldn’t market recover by 2020, or possibly 2025. A nightmare? Yes! Possible? Yes! Is anyone thinking of doing anything to avoid it? No!

  10. Hi Ed,

    I agree with you that Spain won’t go out of the euro and what will happen in an internal devaluation to regain competitiveness.

    In your opinion, how big will this internal devaluation be and how the internal deb will be restructured?

    Manuel

  11. The excess inventory will drop in price, the population numbers will be made up by immigrants, and those that can keep their wits about them will make very nice profits from the greed that brought misfortune on others.

    There will be some pain, but not nearly as much as all the handwringing would have you believe. We inflated the price of real estate into the stratosphere, are we now so surprised that things are coming back to earth?

    Erick

  12. Edward, does competitive exports mean that wages should be cut? If so, aren’t you going for mutually exclusive goals? How do you cut wages and stay attractive to recent immigrants?

  13. Ehh.. Wages dont need to be low for exports to be competetive – Germany is by noones reckoning a lowwage country, and it is a titanic exporter- nor is exports the only reasonable solution to the current mailaise- any exansion of sectors of the economy other than housing construction will help

  14. A cumulative fall of 25% strikes me as extremely unrealistic.

    The fall in Sweden 1991 to 1995 was almost 50% and there were not the oversupply it is in Spain today.

    As Spain has one of the highest pirce of real estate in realtionship to disposable income there is an incentive for a larger fall.

    As I used to live in Spain I know the spanish are indoctrinated with unrealisted perspective on real estate prices but they have to wake up.

    My bet would be at least 60% fall in cumulative prices from the 2007 level perhaps more.

  15. Thomas,

    “Ehh.. Wages dont need to be low for exports to be competetive – Germany is by noones reckoning a lowwage country, and it is a titanic exporter- nor is exports the only reasonable solution to the current mailaise- any exansion of sectors of the economy other than housing construction will help”

    Quite, but look at the skill level of the German workforce. Spain urgently needs to find work for five million new immigrants with lov skill level, and little formal education. What high wage export sector do you suggest they could be absorbed in? And, incidentally, Germany had seven paiful years of internal devaluation from 1998 to 2005 to get to this point, and then was only able to do all the exporting on the back of huge bubble driven consumer booms in countries like the UK, the US, Spain, Russia and much of Eastern Europe.

    Do the sums, the numbers don’t add up, and the problem is urgent, and while we are doing the calculations, Spain is polarising, not into the two Spain’s of Antonio Machado, but into a huge pile of unwanted houses at one pole and a huge pile of unloved and unneeded unemployed migrants at the other. Should we wait till unemployment hits 8 million, or 10 in Spain before we become concerned?

  16. Frederik,

    “My bet would be at least 60% fall in cumulative prices from the 2007 level perhaps more.”

    You are talking about property prices and I think you are in the right ballpark. I am talking about the levels of the consumer price and hourly wage indexes. Here I think a sharp drop of 20% in both of them would do the trick, unfortunately we won’t get this. So the outlook is pretty bleak.

  17. Oliver,

    “Edward, does competitive exports mean that wages should be cut? If so, aren’t you going for mutually exclusive goals? How do you cut wages and stay attractive to recent immigrants?”

    There is a mistake here. I am talking about a drop in wages AND prices. That is why the expression internal devaluation is used – which is only a modern pc euphemism for generalised deflation, which is a horrible thing, but I really don’t see Spain has any alternative now. No one will allow Spain to simply walk away and leave the euro, devalue and default on all that German debt. This would make Lehman Brothers look like a picnic. Spain has to pay, and there is only one way to pay external debt and that is by generating external income – ie exports.

    How does this help migrants to stay, well, you give them work that is the point. Certainly they can’t go to their home countries, they would surely be worse off. Of course the big danger comes when the other EU countries start to recover and people start to vote with their feet. Then we could move from 3 million unsold properties to 4 or 5, and you can start to draw your own conclusions from that.

  18. Manuel,

    “In your opinion, how big will this internal devaluation be and how the internal deb will be restructured?”

    My estimate is 20% should do the trick, but as you can see this isn’t likely to happen. On the debt, the FROB would need to be expanded on the lines of the Irish NAMA, and something will have to be done about the loses on capital values individual mortgage holders will need to take. The ECB can support this process to some extent – as is happening with NAMA – but cannot absorb such large capital loses as Spain will imply. My view is that we then need EU Bonds, and the pain will need to be shared out across all Europeans, just as Florida’s problems were shouldered by all Americans.

  19. Pingback: Three Million Unsold Properties In Spain - Update | afoe | A Fistful of Euros | European Opinion

  20. “There is a mistake here. I am talking about a drop in wages AND prices.”

    That makes sense except that

    1. immigrants want to send money home, so they care about absolute wages (and exchange rates)
    2. how would you drop wages low enough for unskilled immigrants to find jobs? I don’t think outside construction you’ll find such jobs (agriculture aside)

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  22. “Quite, but look at the skill level of the German workforce. Spain urgently needs to find work for five million new immigrants with lov skill level, and little formal education. What high wage export sector do you suggest they could be absorbed in? And, incidentally, Germany had seven paiful years of internal devaluation from 1998 to 2005 to get to this point, and then was only able to do all the exporting on the back of huge bubble driven consumer booms in countries like the UK, the US, Spain, Russia and much of Eastern Europe.”

    one solution might be to teach more people spanish?
    http://www.spanish.language-classes.com anyone?

  23. Pingback: Millions of properties for sale! - Absolute Spain Forum

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