Are mortgages the next headache for Spanish banks? Regulators think the country’s 630 billion euro home loan market can survive the slump relatively unscathed, just as in the last real estate crisis of 1992-1993. Spanish banks’ biggest problem is bad loans made to real estate developers. But it would be optimistic to assume that mortgages will emerge unscathed.
In a recent presentation, the Bank of Spain pointed out that conditions in 1993 were tougher than they are now.
Unemployment hit 24 percent and interest rates soared to 13.9 percent, compared to 2.6 percent today. Even then, only 4 percent of mortgages went sour. And banks were able to sell repossessed properties after the bust without incurring losses.
There are grounds for optimism. Despite falling property prices, Spanish home loans are on average worth just 62 percent of the value of the property. These loans are recourse, making it harder for borrowers to walk away. Spanish families will often help overextended homeowners keep up their mortgage payments. This is reflected in banks’ data: the proportion of mortgages classed as non-performing has fallen to just 2.6 percent.
But today’s real estate bust is worse than in 1993. Spain started building 760,000 new homes in 2006 — almost four times as many as in 1992, even though the population has grown by just 13.5 percent. Most analysts predict Spanish house prices will fall 25 percent from the peak, twice the 12.8 percent drop to date. According to RR Acuna, a consultancy, Spain has 1.5 million unsold homes — about 6 percent of the total stock. These will act as a drag on prices, making it hard for banks to sell foreclosed homes at a profit. Moreover, households are more indebted than in 1993.
How bad could it get? If delinquencies on mortgages reached, say, twice the 1993 peak, banks would have 50 billion euros of troubled loans. Even then, this would be less of a headache than lenders’ 180 billion euros of potentially troubled exposure to construction and commercial real estate. Eventual losses would also be much smaller. Nevertheless, it’s hard to argue that mortgages will not be a problem.
Monday, December 27, 2010
The last time
This is the last time I'm going to get caught up in the great Christmas shopping scam. The retailers have this perfect date of the 25th December which forces the vast majority of people to spend hundreds of pounds on Christmas gifts. And then, on the 26th or shortly after, prices drop through the floor, and we are bombarded with ads for 40 or 50% off. In our local shopping centre today, I was completely pissed off with seeing things that I had paid full price for, at 50% a few days later. The worse thing is, we know this is going to happen, and still most of us fall for it. Not me, not again next year anyway.....
Monday, December 20, 2010
More bloody snow
So, here we are, in the last few working days up to Christmas, and the whole bloody country seems to have ground to a halt again because of the snow.
I live near Gatwick and the news reports are full of stories of people stranded at the airports either trying to get away or trying to get home somewhere before Christmas. The news channels must be loving it - they can spend the whole day going live to helicopter shots over the M25 or Gatwick.
Also, we hear that retailers have seen their share prices fall, as people just haven't been able to get to the shops. One wonders what will happen to the boxing day sales if people haven't been able to get to the shops before Christmas day.
Of course, Christmas is the ultimate shopping scam anyway, in terms of forcing people to buy before the 25th, even though we know that prices will be lower on the 26th.
In economic news we hear from the CBI that they have scaled down their estimate for 1st quarter growth to an insipid 0.2%, with not much improvement through 2012. There also seems to be some expectation that interest rates will have to rise, to help curb inflation. Given that we are all going to be hit by higher VAT and other increases next year, that's hardly going to be welcome news. In terms of people with Spanish mortgages or other euro mortgages, there may be a small upside as the pound may strengthen with higher interest rates. Whatever happens, it looks like being a tough 2011.....
I live near Gatwick and the news reports are full of stories of people stranded at the airports either trying to get away or trying to get home somewhere before Christmas. The news channels must be loving it - they can spend the whole day going live to helicopter shots over the M25 or Gatwick.
Also, we hear that retailers have seen their share prices fall, as people just haven't been able to get to the shops. One wonders what will happen to the boxing day sales if people haven't been able to get to the shops before Christmas day.
Of course, Christmas is the ultimate shopping scam anyway, in terms of forcing people to buy before the 25th, even though we know that prices will be lower on the 26th.
In economic news we hear from the CBI that they have scaled down their estimate for 1st quarter growth to an insipid 0.2%, with not much improvement through 2012. There also seems to be some expectation that interest rates will have to rise, to help curb inflation. Given that we are all going to be hit by higher VAT and other increases next year, that's hardly going to be welcome news. In terms of people with Spanish mortgages or other euro mortgages, there may be a small upside as the pound may strengthen with higher interest rates. Whatever happens, it looks like being a tough 2011.....
Sunday, December 19, 2010
Poor sales to non-residents in Spain
Amazing property sales figures for the last quarter show that the number of properties sold to non-residents was, wait for it, 490. Yes, 490, in the whole of Spain!
I would imagine that a few years ago there would have been some large agents that would have expected to sell 500 units in a quarter!
So it seems that, even with falling prices (supposedly) the foreign buyers are hardly falling over themselves to buy places in Spain.
Clearly everyone seems to have their own economic problems at home, and the outlook for Spain seems to be shaky at best.
Also, although the banks can be identified as being the cause of a lot of problems with their easy lending practices, the current best offer of 60% LTV is not really very enticing for non-cash buyers. You are going to need 40% deposit plus up to 15% to cover all the costs - about 55% of the total purchase price. It's not difficult to see why the sales are so low.
I would imagine that a few years ago there would have been some large agents that would have expected to sell 500 units in a quarter!
So it seems that, even with falling prices (supposedly) the foreign buyers are hardly falling over themselves to buy places in Spain.
Clearly everyone seems to have their own economic problems at home, and the outlook for Spain seems to be shaky at best.
Also, although the banks can be identified as being the cause of a lot of problems with their easy lending practices, the current best offer of 60% LTV is not really very enticing for non-cash buyers. You are going to need 40% deposit plus up to 15% to cover all the costs - about 55% of the total purchase price. It's not difficult to see why the sales are so low.
Thursday, December 2, 2010
How the Irish Bailout works
It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note onthe desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub.The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit.The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.The hotel proprietor then places the €100 note back on thecounter so the rich traveller will not suspect anything.
At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town.No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.
And that,ladies and gentlemen, is how the bailout package works.
On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note onthe desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the pub.The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit.The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note.The hotel proprietor then places the €100 note back on thecounter so the rich traveller will not suspect anything.
At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money and leaves town.No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.
And that,ladies and gentlemen, is how the bailout package works.
Wednesday, December 1, 2010
Spains banks seen as weak links
(Reuters) - Mounting bad loans, competition for funds and exposure to wobbly Portugal make Spain's banks a potential liability as the country fights to avoid an Ireland-style bailout.
A burst property bubble also weighs on the sector, but the immediate worry is over the spring of next year when both the banks and the government will be in the market for a combined 50 billion euros ($66 billion) of funding.
"Problems may well arise when banks need to turn over debt at the same time as the government if confidence remains low," said Javier Bernat, analyst at Caja Madrid.
A wave of consolidation and conservative rules have supported the banks so far, but after Ireland accepted an 85 billion euro aid package, investors are turning their eyes to Portugal and Spain.
In the larger economy, mid-size banks such as Banco Sabadell
and Banco Pastor are seen as potentially the most vulnerable.
They were frozen out of European interbank markets earlier this year, and are not as diversified as global giants BBVA and Santander.
Capital requirements for Spanish banks have traditionally been more stringent than in other countries and the average core Tier 1 capital of the sector was 7.7 percent under a crisis scenario in July's Europe-wide stress tests.
But the bar has been raised for all banks since then, as new capital rules have been agreed, leaving Spanish banks looking less well capitalized than many international rivals.
The weakest link in Spain's banking system are regionally focused savings banks -- who had an average core Tier 1 capital ratio of only 5.5 percent in the stress tests. They have already gone through a forced consolidation process that has cost the government 15 billion euros in credit lines.
Shares in Santander, the euro zone's biggest bank, sagged 3 percent to an 18-month low on Tuesday as worries about the sector grew.
Spain's economy is larger than those of fellow euro zone peripheral countries Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress cutting its budget deficit, a bailout would strain the European Union's safety net.
With the economy stagnant and spending cuts landing, market jitters over possible bank funding problems have pushed up financing costs for Spain to euro-zone lifetime highs of about 5.4 percent for 10-year sovereign bonds.
Another source of concern is heavy exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108 billion exposure to Portugal at the end of March, according to Bank of International Settlements data.
A burst property bubble also weighs on the sector, but the immediate worry is over the spring of next year when both the banks and the government will be in the market for a combined 50 billion euros ($66 billion) of funding.
"Problems may well arise when banks need to turn over debt at the same time as the government if confidence remains low," said Javier Bernat, analyst at Caja Madrid.
A wave of consolidation and conservative rules have supported the banks so far, but after Ireland accepted an 85 billion euro aid package, investors are turning their eyes to Portugal and Spain.
In the larger economy, mid-size banks such as Banco Sabadell
and Banco Pastor are seen as potentially the most vulnerable.
They were frozen out of European interbank markets earlier this year, and are not as diversified as global giants BBVA and Santander.
Capital requirements for Spanish banks have traditionally been more stringent than in other countries and the average core Tier 1 capital of the sector was 7.7 percent under a crisis scenario in July's Europe-wide stress tests.
But the bar has been raised for all banks since then, as new capital rules have been agreed, leaving Spanish banks looking less well capitalized than many international rivals.
The weakest link in Spain's banking system are regionally focused savings banks -- who had an average core Tier 1 capital ratio of only 5.5 percent in the stress tests. They have already gone through a forced consolidation process that has cost the government 15 billion euros in credit lines.
Shares in Santander, the euro zone's biggest bank, sagged 3 percent to an 18-month low on Tuesday as worries about the sector grew.
Spain's economy is larger than those of fellow euro zone peripheral countries Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress cutting its budget deficit, a bailout would strain the European Union's safety net.
With the economy stagnant and spending cuts landing, market jitters over possible bank funding problems have pushed up financing costs for Spain to euro-zone lifetime highs of about 5.4 percent for 10-year sovereign bonds.
Another source of concern is heavy exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108 billion exposure to Portugal at the end of March, according to Bank of International Settlements data.
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