Tuesday, November 10, 2009

Andalucia Subsidy for Homebuyers

An article below by Mark Stucklin of Spanish Property Insight that I have printed in it's entirety.
I had to read it 3 times just to take it all in. I think that it would be a good thing if there is demand for this housing and there are enough local residents that want to take up the offer and mortgages to purchase their first home. If the properties are well priced then it may be a decent bet over 9 years - given a return to some sensible level of property price increases - say 2-3% per annum.
Along with the other deals that seem to be offering 100% mortgages for repossessed homes, it does seem to me that the banks could be helping their existing customers more, by having more options to interest-only remortgages etc. That way many people that are on 25 year (say) repayment loans, could take a couple of years interest only, to lower their monthly outgoings and reduce risk of repossession and bad debt, at least until the market settles down a bit. Most people would rather keep hold of their properties and sell in a few years time.

Here is the article-

The government of Andalucia, or Junta, announced yesterday a subsidy of 1 billion Euros to help liquidate the region’s property glut estimated at around 70,000 newly-built homes.

Like the ‘cash-for-clunkers’ programme used to subsidise car sales, public money will now be showered on house-hunters in Andalucia. But second home buyers can stay in their seats as the scheme only applies to local residents buying main homes. Even so, it could benefit foreigners living in Andalucia, and help lift the market out of its slump, which might lift prices for all types of property.

How it works

The way it works is developers participating in the scheme have to offer their property for sale at mortgage cost, wiping out their margins and giving a discount of 20%. Participating banks, for their part, will loan 100% interest only for the first 3 years. Starting in the fourth year the Junta will offer loans to subsidise mortgage payments for up to 5 years and a maximum of 15,000 Euros. As a result, buyers will save as much as 40% over 8 years, according to calculations by the Junta.

The offer stands until the end of 2010, the properties must be newly- built, and the mortgage no greater than 245,000 Euros, the price limit for social housing. Mortgages must be 100% LTV, up to 30 years, charging an interest rate of Euribor +1%

Read the fine print, though, and the Junta isn’t being so generous. In year 9 mortgage lenders have to reimburse the subsidy to the Junta and add it onto the outstanding mortgage, so the borrower pays in the end. Nevertheless, thanks to inflation, buyers will probably have to pay back less, in real terms, than they borrow. Many people expect inflation to take off in the next few years.


You could argue that it is morally questionable for the government to be spending 1 billion Euros subsidising Spanish property buyers when there are so many other more needy causes. And isn’t this is just a wheeze to get buyers to pay inflated prices for homes today whilst transferring the burden of payment onto tax payers in the future?

Wouldn’t it be cheaper, and cause less economic distortion, just to drop prices today to a level that people can afford without crucifying themselves on a 30 year mortgage subsidised by the government?

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