Fitch Points to Real Estate Bubble in Central Madrid and Barcelona

24 October 2017

The Spanish property market and the sharp increases in housing prices in the principal Spanish cities have already triggered alarms

The Spanish real estate market and the sharp price increases recorded in major Spanish cities are triggering alarms. The rating agency Fitch was the first voice to take a position on a question that has been looming for several months: is the market just frothy or are we facing a full-blown bubble?

Fitch’s opinion on the matter is clear. The agency is warning of a bubble in the centre of Spain’s principal cities, though it adds that it does not foresee a generalised bubble in house prices in the country in the short term, due to the high ‘stock’ that must still be absorbed and the restrictions to the purchase of homes.

Just to get an idea, recent data from the valuation firm Tinsa shows how housing prices increased by 20.6% in Barcelona and 15.5% in the capital of Spain in just the last 12 months. These percentages hark back to number last seen in Spain’s pre-crisis boom years.

An analysis of the housing sector in Spain, published on Tuesday by the company, explains that bubbles in specific types of highly localised assets are already evident. Fitch highlights how high demand and limited supply in the housing market in the country’s principal cities are causing severe increases in prices, which are increasingly “unsustainable.”

As noted, annual growth in housing prices of between 15% and 35% have been limited to prime neighbourhoods in Madrid and Barcelona. Fitch believes that this demand has been underscored by quantitative easing, buying by foreigners and investment decisions, as investors look to benefit from asset appreciation and rental yields. However, the ratings agency does not believe that all this mix of  “ingredients” will influence the general real estate market in the short term.

Fitch says it is “highly unlikely” that problems in the real estate market are correlated with the economic recovery

Similarly, the agency asserts that it is “highly unlikely” that the problems in the real estate market are correlated with the economic recovery in general, and foresees that the average sale discounts of foreclosed homes will remain high and stable over the next few years.

This situation will continue as long as the banking sector continues to unload its excess of stock of houses and while buyers insist on deep discounts when acquiring foreclosed homes, the rating agency emphasised.

According to Fitch data, discounts on the sale of foreclosed flats remains “high”, up to 60% on average in relation to the initial valuation, with a range of between 50% and 75%. The dispersion of discounts on the sale of foreclosed properties is shrinking. In fact, the gap between discounts from one end to the other has been reduced to 25 percentage points at the end of 2016, from 35 percentage points in the period between 2010 and 2011. However, the agency advises out that the correction is not generalised.

Difficulties accessing housing

On the other hand, Fitch explains that access to housing will continue to be complicated because the increase in the housing price index exceeds wage adjustments.

Thus, the capacity of families to acquire property is decreasing, also due to a labour market that favours temporary rather than indefinite contracts, leading to difficulties in making the initial 20% deposit required to purchase a home.

It also underlines that access to housing in the long term may be limited due to the gradual elimination of monetary stimuli in the market and the likelihood of higher interest rates.

Original Story: El Confidencial

Translation: Richard Turner

The IMF Commends Sareb’s “Effective” Management & Divestment Progress

10 October 2017 – El Diario

On Friday, the International Monetary Fund (IMF) commended the “effective” management of Sareb and its progress in the asset divestment process, which has enabled the real estate company to liquidate 22% of its portfolio and 20% of its debt in its four years of life.

“To date, Sareb has fulfilled its objectives quite well, and the review of its business strategy seems to be well designed”, acknowledged the supervisory body in its latest report evaluating the Spanish financial sector.

Nevertheless, it adds that the company, created in 2012 to help with the clean-up of the banking sector, will face challenges in the future.

In its report published on Friday, the IMF refers to: the highly sensitive nature of Sareb’s activity to the evolution of real estate prices; the financial expenses that the entity must pay to service the debt that it took on to purchase assets back in the day; and the “stiff competition” from the banks, which are also divesting their real estate portfolios.

Even so, the body endorses the progress that Sareb has made to reduce the perimeter of assets received from the financial institutions by so much, as well as to service its commitments to repay its debt, which is guaranteed by the Spanish Treasury.

For the IMF, behind this progress, is the “effective” approach that Sareb applies to managing the portfolio, and which includes strategies for “the transformation of loans into properties, the recovery of loans, the sale of assets and the reactivation and sale of suspended projects”.

In the opinion of the institution, which is headquartered in Washington, Sareb is continuing to play a “critical role in the preservation of financial stability”, and therefore recommends greater involvement of the authorities in the preparation of the entity’s business plan.

The report that the IMF published on Friday focuses on analysing the weight that doubtful loans still play in the Spanish banking sector, which is still high despite the transfers that were made to Sareb when it was created.

In this sense, the international body echoes the initiative that the so-called “bad bank” has launched to give greater dynamism and transparency to the sale of loans, through an online platform, which is now operational, albeit in the pilot phase, on the company’s website.

Original story: El Diario

Translation: Carmel Drake

Eurostat: House Prices Rose By 6.3% In Q1 2016

13 July 2016 – El Mundo

House prices in Spain rose by 6.3% YoY in Q1 2016, which represents the highest increase since Q3 2007, before the burst of the Spanish real estate bubble, according to the most recent data from the EU’s statistics office, Eurostat.

During the fourth quarter of 2015, house prices in Spain rose by 4.3% YoY, i.e. by two tenths less than the YoY increase of 4.5% recorded in Q3 2015.

In this way, the Spanish real estate market has recorded eight consecutive quarters of YoY rises in terms of house prices, after six consecutive years of price decreases.

Compared to the previous quarter, house prices in Spain rose by 1.4%, after remaining stable during the final quarter of 2015, which represents the highest QoQ increase in real estate prices since the second quarter of last year, when they increased by 4.1%.

Across the Eurozone as a whole, house prices rose by 3% YoY during the first quarter of 2016, in other words, by four tenths more than the YoY increase recorded in Q4 2015 and their highest increase since Q1 2008. In quarterly terms, house prices in the Eurozone rose by 0.4% between January and March, after increasing by 0.1% during the previous quarter.

Across the European Union as a whole, prices rose by 4% YoY, compared with an increase of 3.6% during the fourth quarter, whilst the quarterly increase in house prices across the twenty eight countries amounted to 0.7%, i.e. three tenths more than in the previous three months.

Of the countries for which data was available, the highest YoY house price increases were recorded in Hungary (15.2%), Austria (13.4%) and Sweden (12.5%), whilst price decreases were observed in Italy and Cyprus (-1.2% in both cases).

Compared with the previous quarter, the highest increase in house prices was recorded in Hungary (5.2%), followed by Austria (4.2%) and Romania (3.3%), whilst the most significant price decreases were registered in Cyprus (-3.4%) and Malta (-2.8%).

Original story: El Mundo

Translation: Carmel Drake

Eurostat: Spanish House Prices Rose By 4.5% YoY In Q3 2015

21 January 2016 – Cinco Días

The evolution of house prices across the European Union varied significantly between countries during the third quarter of 2015, just as it did between different regions in Spain. In this way, the data published yesterday by Eurostat, the EU’s Office for Statistics, shows that house prices rose by 2.3% on average in the Eurozone and by 3.1% across the EU as a whole, compared with the same period in 2014. If the evolution of house prices is measured with respect to the second quarter of 2015, then they rose by 1.0% on average in the Eurozone and by 1.3% across the EU as a whole.

Spain stands out in the ranking by country, with an average increase of 4.5% between July and September compared with the same period last year. As such, house prices here rose by almost twice the average recorded in countries that share the euro currency. Moreover, that figure represents the greatest increase since the last quarter of 2007. The increase amounted to 0.7% with respect to the previous three months. The highest YoY increases amongst State members during Q3 2015 were recorded in Switzerland (13.7%), Austria (9.3%), Ireland (8.9%) and Denmark (7.2%).

By contrast, the countries that recorded the most significant price decreases were Letonia, with a YoY decline of 7.6%, Croatia (-3.0%), Italy (-2.3%) and France (-1.2%).

Economic recovery

A comparison of the evolution of real estate prices and GDP in the Eurozone, as well as in the rest of the EU, shows that in global terms, houses are currently being sold at higher prices in those countries in which the economic recovery is well underway and where employment is also on the rise.

Moreover, the improvement in access to credit in general terms across the whole of Europe is driving up property sales, such as in the case of Spain, and so the logical result is that prices are also rising. (…).

Other noteworthy statistics include the fact that house prices rose by 5.6% YoY in both the UK and Germany in Q3 2015. (…). Meanwhile, in France and Italy, house prices depreciated by 1.2% and 2.3% YoY in the same period (…).

Original story: Cinco Días (by Raquel Díaz Guijarro)

Translation: Carmel Drake