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We are not alone: Spain deals with its own housing slump

SLOWDOWN: Spooked by the U.S. subprime crisis, many banks "have turned off the spigot," a real estate exec says.

MADRID, SPAIN - The phones don't ring off the hook any more at Spanish real estate offices, once the beneficiaries of a sizzling property market. In fact, they hardly ring at all.

Sharply higher interest rates, a glut of homes and newly jittery banks have come together to stall the engine that has driven one of Europe's top-performing economies for more than a decade. And as the market slows, so has Spain's economic growth.

Promoters who just a few years ago could sell new homes just by showing crude blueprints -- they didn't bother to build model homes or apartments -- are desperate, sometimes giving away a year's worth of mortgage payments, cars, trips and other freebies to lure buyers.
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AP photo
This building is under construction in Pamplona, northern Spain. Promoters who just a few years ago could sell new homes just by showing crude blueprints nowadays find themselves using an array of freebie options to make sales.

"The market has become paralyzed. Things are just paralyzed," said Javier Martinez de los Santos, manager of a realtors group called the Business Association of Property Management.

Recent Boom Times

Indeed, that market used to be paradise for builders and homebuyers enticed by interest rates below 3 percent. Real estate agents say people would literally line up to buy. Housing prices rose 17 percent in 2004, for instance, and a still-robust 9.1 percent last year.

But the government predicts a more modest 5 percent rise for 2007, and in some areas of big cities like Madrid and Barcelona, prices have already started to fall, according to a survey released in October by www.idealista.com, a major Spanish real estate portal.

Banks used to trip over each other competing to hand out low-interest-rate mortgage money. Interest rates have jumped nearly three points in as many years, however, which means much heftier monthly payments for homeowners because the vast majority of mortgages in Spain are adjustable-rate.

So banks worried over the prospect of defaults are now much more miserly, ending the once-common practice of financing 100 percent or even more of a home purchase, and raising the threshold for what people need to earn in order to qualify for a loan.

Lenders Reluctant

They are also much more reluctant to lend to developers, out of fear of ending up stuck with property nobody wants. Growth in construction is slowing -- from an annual rate of 4.6 percent in the second quarter of 2007 to 3.8 percent in the third quarter.

"There is still demand. There are more people looking for a house now than before. The problem is the banks have turned off the spigot," said Jesus Duque, vice president of Alfa, a Spanish real estate chain with 600 offices around the country.
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One thing that has spooked Spanish banks is the sub-prime mortgage crisis in the United States. The credit crunch has had no direct, major effect in Spain or an equivalent version because lending standards here are tougher than in America, real estate people say.

But it has served to make banks wary of lending more money, even to each other. With so much debt floating around out there, they are afraid of homeowners or developers defaulting on loans and leaving them short of cash. For now, there's been no significant rise in defaults, the Bank of Spain says.

Whereas two years ago Spanish banks did nothing but advertise cheap mortgages, they now peddle high-interest, fixed-rate savings products.

"There is a certain generalized panic," Duque said. "Right now the banks do not want to let go of money. They want to acquire liquidity."

Out on the street, signs of the real estate slowdown and suffocating debt levels are everywhere.

Spain's gross domestic product in the third quarter posted its weakest increase since late 2004, due to a big drop in private consumption and investment in housing. Unemployment in the construction sector is soaring. Car sales -- a key barometer of disposable income -- are down. For many families, mortgage payments devour half of their disposable income.

De los Santos said half of Spain's real estate offices might fold by April.

And now it takes much longer to sell an existing home -- as much as eight or nine months, compared to a fraction of that when the sector was booming two years ago. These days, it's a buyer's market.

Malena Garcia Mexia, a 41-year-old dance instructor in Torrelodones, 20 miles northwest of Madrid, knows all about it. She and her husband, Luis, put their three-bedroom apartment up for sale in November 2006 and have got nibbles but nothing serious. They've lowered their price three times only to have prospective buyers now ask them to come down as much as 20 percent more.

"People try to take advantage of the situation," she said.

http://www.pe.com/business/local/stories/PE_Biz_D_spainhousing30.21ef65e.html
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