Ghost Towns’ Appear in Spain as Decade-Long Housing Boom Ends
2007-06-05 18:16 (New York)
By Sharon Smyth and Ricard Alonso
June 6 (Bloomberg) — Javier Usua and Ruth Graneda never got
out of the car when they visited Sanchinarro and Las Tablas, two
of Madrid’s biggest new suburban developments. The concrete-block
buildings and empty streets were all they needed to see.
“We came to look at apartments but found ghost towns,” said
Usua, a 27-year-old taxi driver. “You’d need to drive miles for a
loaf of bread or cigarettes and my girlfriend found it creepy and
unsafe so we turned around and left.”
The abandoned developments are evidence of a housing glut
that will lead to Spain’s first decline in home prices since at
least 1992, when the Housing Ministry started keeping records.
Spanish builders constructed 750,000 houses and apartments last
year, more than France and Germany combined, while annual demand
runs about 60 percent of that, according to the Finance Ministry.
“The real killer of the housing market is the immense
oversupply,” said Gonzalo Bernardos, a professor of economics at
the University of Barcelona. “Prices are already unofficially
New and existing house prices will drop by 20 percent from
now through 2009, Bernardos estimates. The country built an
average of 432,411 houses per year from 1996 to 2005, more than
France and the U.K. combined.
Spanish home prices have more than doubled since 1998,
exceeding growth rates in the U.K. and Ireland, two of Europe’s
fastest-growing markets. The increase has been driven by a drop in
interest rates to less than 3 percent from about 15 percent as
Spain adopted the euro, household incomes that swelled as women
joined the workforce, and a surge in vacation home purchases by
Northern Europeans, mainly Germans and Britons.
`Appraisals Are Poetry’
As prices start to decline, Spanish homeowners may face the
same challenges as buyers in the U.S., which is in the second year
of a housing slump. Falling prices may spur higher delinquencies
as buyers face difficulty refinancing. Spanish buyers may face an
even higher risk of losing their property because housing prices
are based on appraisals rather than actual sales, and appraisers
often inflate values.
“We live in a country where everybody understands that
appraisals are poetry,” said Jesus Encinar, chief executive
officer and founder of Idealista.com, a property Web site that
tracks existing home prices in Madrid, Barcelona and Valencia.
“Bankers have said to me, `Why do you care if the appraisal is
fake? It will be true in the future.”’
The average house price in Spain was 276,300 euros ($370,670)
in December, according to Sociedad de Tasacion, a property
company. That’s up 107 percent since the same period of 2000.
Existing home prices in Madrid, now stagnant, may start to
fall by 0.2 percent in the first quarter of next year, Encinar
said. Madrid tends to lead the rest of the country, so prices
throughout Spain probably will begin to drop by the end of 2008,
Banks loaned 250 billion euros to developers last year, eight
times more than in 1998, and 134.3 billion euros to construction
companies, data compiled by the Bank of Spain show.
They loaned 544 billion euros to homebuyers, four times the
value of mortgages in 1998. Bilbao Bizkaia Kutxa has introduced
50-year mortgages and Banco Bilbao Vizcaya Argentaria SA has
started making 40-year mortgages. Bilbao Bizkaia also offers loans
up to 100 percent of the appraised value. That means even a modest
decline in home values, combined with rising interest rates, may
result in higher foreclosures.
“The problem here is that people have this unshakeable
conviction that prices simply cannot fall,” Encinar said.
The amount of Spanish families’ wealth tied up in property in
2004 amounted to 521 billion euros, or 509 percent of gross
domestic product, according to the Bank of Spain. U.S. households
held $17.2 trillion of real estate, or 159 percent of GDP, in the
same period, according to the Federal Reserve.
Defaults on Spanish home loans in the first quarter were the
highest in at least four years, according to Standard & Poor’s.
The S&P Spanish RMBS delinquency index for loans backing
residential mortgage-backed notes increased by 23 basis points to
1.75 percent during the first three months, S&P analysts wrote in
a report on May 29. That compares with an index level of 0.7
percent in March 2004.
“Banks have lent a tremendous amount to developers who used
the money to buy land and now they have no choice but to build
houses on it to recoup their money to repay their own loans,”
said Pablo Gaya, head of analysis at Capital at Work Investment
Partners in Madrid. “Any sharp downturn in the housing market
would make it even harder for developers to sell and may lead to
defaults on loans, which would cause a headache for banks.”
Rate increases have a more direct immediate effect on Spanish
families because 96 percent of mortgages in Spain are variable
rate, compared with about 20 percent in the U.K. and 12 percent in
The Organization for Economic Cooperation said in a Jan. 23
report that Spain’s decade-long real estate bonanza boosted
household debt as a percentage of disposable income to 115 percent
in the second quarter of 2006 from 45 percent in 1996, making the
Spanish market among the most vulnerable to higher interest rates.
Concerns about Spain’s real estate market and economy are
keeping Usua and Graneda from buying right now.
The couple now lives in a two-bedroom apartment in the
central Madrid neighborhood of La Prosperidad that belongs to
Usua’s father and uncles. They were hoping to purchase an
apartment in Sanchinarro or Las Tablas to have their own place.
The plethora of “for sale” signs and construction in both
areas also is scaring them off, Usua said.
“When rates rise and people who are already up to their
eyebrows in debt find they can’t pay their mortgages, the last
thing they are going to do is take a taxi, or eat out, and that
affects you, me and everyone,” Usua said. The apartments they
were looking at cost from 300,000 euros to 400,000 euros.
`Flood of Speculators’
Just as developers profited from first-time buyers, they
also have benefited from investors who bought property in
anticipation prices would rise.
The result has been that builders were fooled about the true
demand, said Bernardos at the University of Barcelona.
In Sanchinarro, Las Tablas and similar developments, “a
flood of speculators bought up apartments thinking they would make
a killing as the boom continued,” said Bernardos. “Now big
developers are competing with these very speculators for sales as
they flee the market.”
Olgar Del Corral, a 32 year-old plastic surgeon from Madrid,
said she bought a second home because house prices “always
“It’s clear that investing in a property is a much safer bet
than putting money into the stock market for example where you
never know what is going to happen,” she said.
BBVA, Spain’s second-largest bank, estimates that 700,000 new
houses will be built in 2007, 100,000 less than the number
finished in 2006.
“If housing starts continue at present levels, the chances
of a price crash in the Spanish property market will increase
significantly,” said Mark Stucklin, head of Spanish Property
Insight, a real-estate consulting firm in Barcelona.
Investors have already demonstrated their concern that the
country’s property boom is over. Shares of the nine largest
publicly traded real estate companies declined by an average 25
percent in the past six months.
Metrovacesa SA, Spain’s largest property company, offers
1,000-euro discounts and an additional 600 euros per child during
promotional festivals. Lubasa, a closely held real estate company
in Castellon, gives buyers vouchers worth 4,000 euros to spend in
Grupo Pinar, a Madrid-based developer, tempts clients with
the offer of a Mercedes C-Class car or a 25,000-euro discount on
the price of some of its homes. Valencia Grupo 90 Inmobiliarias
throws in a free garage.
Juan Bautista Soler, president of Valencia Football Club and
owner of private real estate company Grupo Bautista Soler, was
selling nine houses per month from September to December. Now, he
said he’s selling one per month.
“We’re facing what could be a significant crisis,” he said
in an interview in London. “All developers are feeling it and I
don’t know why they don’t come out and say it.”
The average value of approved Spanish mortgages fell 8.8
percent in March to 162,265 euros from an average 177,916 euros in
February, the National Statistics Institute said last week on its
“If we do encounter problems in the labor market, then
families and banks will have problems,” said Enric Reyna,
president of APCE, the Asociacion de Promotores Contructores y
Constructores de Edificios de Barcelona y Provincias, in an
interview. “Interest rates have to be kept at reasonable rates to
prevent problems because banks can’t extend mortgage repayments
A 30 percent decline in house prices in two years would trim
0.4 of a percentage point to 0.7 of a percentage point from
economic growth each year, International Monetary Fund economist
Julio Escolano said in a May 18 report.
According to analysts at Ahorro Corporacion, who estimate
that Spain only needs 400,000 to 450,000 new housing units per
year, a 30 percent drop in new housing starts is necessary to
balance supply with demand. A reduction of that magnitude would
result in about 200,000 job losses, the analysts estimated.
In Sanchinarro and Las Tablas, Esperanza Aguirre, president
of the regional government of Madrid, opened the first light
railway stop last month. No passengers descended from or boarded
the bright red-and-blue train this week when it stopped at the
station during lunch time. Spaniards traditionally go home for
“Not even God lives here,” Usua said.