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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Monday, September 21, 2009

Three Million Unsold Properties In Spain?

Yes, up to three million. That was the conclusion reached in the 2009 annual report on the Spanish property market prepared by Madrid-based real estate analysts R. R. de Acuña & Asociados. The report is described by Sunday Times Spanish Property Doctor columnist Mark Stucklin as one of the most influential annual reports on the sector, so the conclusions are hardly to be sneezed at, indeed the assumptions made in the calculations appear on the surface to be entirely plausible. In fact, having read the summary of the report in this article here, Variant Perception's Jonthan Tepper wrote to me to ask whether I thought we were being "dire enough". Yep. Sufficient unto the day is the direness thereof.

So where does the 3 million number come from? Well, according to the estimates of R. R. de Acuña & Asociados - as outlined in the Expansion article - there are currently 1.67 millon flats and houses on the market and looking for a buyer in Spain. Roughly 1.1 million of these are new, while a further 518,000 second hand residential properties are now estimated to be languishing on the market. To this number we then need to add the 327,350 properties under construction but still unfinished - these will either need to be completed or knocked down, but in either case they represent a problem.

Finally we come to the 1.098 millon housing units for which planning permision has already been granted together with an allocated credit line of 52.947 billion euros courtesy of the Spanish banking sector. Of course maybe may say, well these properties will never be buit, and this may be true, but deciding whether or not to build them is a much more difficult decision to take than it seems, since any such decision would be equivalent to throwing the towel in on Spain's construction industry, and would constitute an implicit recognition that the policy pursued so far by the Zapatero administration of trying to soldier on through to 2011 had been a failure. Construction activity is still only down some 30% from peak, and if we think it will need to fall from nearly 12% to around 4% then it still has at least another third (or fifty percent of current output) to come down, and this is where all the issues start.

Deciding not to go ahead with these houses would basically mean very little construction activity in Spain during the next couple of years or more. Evidently this would push up unemployment even further, and here is where the problem comes, since this deterioration in the general economic situation would make it even harder for the property market to recover.

Any kind of bubble like the one we have had requires that everything feeds on itself, the moment this stops happening everything starts to deflate, and this is what is happening now. Simply not building - which I obviously think is what they have to decide - would mean another vicious twist in the screw, more construction company bankruptcies, and hence more bad loans for the banks.

Faced with this, and crazy as it seems, there is a certain logic in continuing to fund zombie builders to build houses that evidently no one needs, since money is cheap from the ECB, and this way the bad-loan book looks, well if not good, at least not so bad. And who knows - so the thinking goes - maybe one day we will find a use for all these houses. And this is where the pre-funding issue comes in, since the builders have had to demonstrate in order to get the permission that they have the financial resources to see the projects through, and the banks accordingly have had to set aside the 50 billion euros or so in anticipation of this, which is why, as Madrid University Professor Daniel Villaba pointed out earlier in the year, keeping funding the zombie builders means effectively starving Spain's Pymes (or small businesses) of much needed working capital. But the banks can't simply tell the builders to go to hell, and not to build, since if they do the builders will declare themselves insolvent, with the evident consequences that that much cultivated non-Performing Loans rate would suddenly shoot up.

So adding everything up, we find that between them Spanish estate agents, banks, savings banks and private investors are now either owning or holding the tab on a grand total of something like 3.1 million properties, all of them looking for, or about to be looking for, that ever so elusive thing in Spain, the potential homebuyer.

Another interesting conclusion is that 75% of existing builders will simply go out of business in the next five years - since which everway you look at it, building now or building later - Spain's construction sector is hopelessly overpopulated.

Fortunately Mark Stucklin has - on his Spanish property buff blog - given us what he calls a a "bulleted summary" of the main points in the report, and these I reproduce below. To his summary I would only add two further points of my own.

Firstly the estimate of 25% unemployment by the end of next year contained in the report may well be on the low side, especially if the Spanish government is running out of funding for the stimulus programmes. Spanish INEM employment department officials have already leaked estimates that if the Plan E type projects are not renewed, then we could see something like 700,000 additional unemployed in October and November of this year alone. If these warnings turn out to be realistic then my feeling is that we will hit 25% unemployment around Easter, and then start heading up towards 30%. We should break through the 30% level around the turn of 2010/11 or by the spring of 2011, depending on a lot of factors which are still hard to see at this point. And where will we stop? No idea at all, since this simply depends on when the Spanish citizenry decide they have had enough and a package of emergency measures are put in place. It is hard, given the way the eurosystem works, to see how a "short sharp shock" may be administered, but something of the kind will be needed, or the patient will simply arrive moribund on the operating table.

My second observation is merely anecdotal, but the Acuña & Asociados report places a lot of emphasis on the coastal situation, which has, to some extent, already been "factored in" by most participants, however quite by chance I have talked with a number of people in recent days who have stressed with me just how serious the situation is in the satellite towns around Madrid, built as they have been for Ecuadorians who never arrived, or Romanians who have already left. I think this element is yet awaiting a proper accounting, and the cost is unlikely to be small.

Summary by Mark Stucklin of R. R. de Acuña & Asociados 2009 Annual Report On The Spanish Property Market

- “There are no green shoots around here,” said Fernando Rodríguez y Rodríguez de Acuña, president of the company, describing the state of the Spanish property market during a press conference introducing the report.

- At end of 2008 the supply of property for sale or under construction was 1,623,042, of which roughly 580,000 were resales, 500,000 newly built but unsold, and 470,000 under construction and nearing completion.

- Annual demand estimated as follows: 233,000 in 2008, and 218,000 in 2009.

- That means there are some 1,6 million homes on the market, whilst demand in the next few years is expected to run at around 220,000 homes. At current levels of demand it will take 6 to 7 years for the real estate sector to recover. So it could take until 2016 for the market to digest the current property glut.

- Looking at the market for holiday homes on the coast, local demand was estimated at 42,000 in 2008, expected to fall to 40,000 in 2009, whilst foreign demand for holiday homes on the coast was 21,000 in 2008, falling to 20,000 in 2009.

- The report singles out the coast as one of the areas with the biggest glut of property, and therefore the biggest problem that will take the longest to resolve.

- Higher priced market segments are also a problem; more expensive market segments are expected to take more than 6 years to clear, compared to 3 years or less at the cheaper end.

- The only way developers and banks will get rid of the glut of property in the medium term is selling at a loss.

- After falling 1.83% in 2008, overall prices will fall 9.55% in 2009, 9.32% in 2010, and 4.81% in 2011, a cumulative fall of just under 25.5% in nominal terms.

- After falling 3.32% in 2008, coastal prices will fall 11.28% in 2009, 7.98% in 2010, and 4.31% in 2011, a cumulative fall of 27% in nominal terms.

- Housing starts will fall to between 50,000 and 75,000 a year in the next few years, down from more than 700,000 in 2005. “The market situation doesn’t justify more building, and anyway the banks won’t lend money to build something that won’t sell,” said Fernando Rodríguez y Rodríguez de Acuña.

- Thanks to long lead times in the construction business, the full economic impact of the collapse in residential construction is yet to be felt. The darkest hour for the Spanish economy will come in the second half of 2010, when unemployment could reach 25%.

- Developers will go out of business in greatest numbers during 2010 and 2011. “It gets increasingly harder for developers to refinance with assets they either can’t sell or which are already mortgaged, and are increasingly devalued,” said Fernando Rodríguez y Rodríguez de Acuña, who predicts that 75% of developers will be wiped out in the next 5 years by a combination of too much debt, the market slump, and “bad management”.

- Recovery won’t come until 2013, by which time the sector will be just half the size it used to be, if that.

17 comments:

Duke Ellington said...

Splendid stuff Edward. R. R. de Acuña & Asociados seem to have really done their homework here, the same number that has been bandied about for the last year and a half - 1 million new homes unsold - has really gotten ridiculous by now.

If you include in the 1,100,000 approved projects that have already obtained funding but haven't been started yet and the 327,000 that are partly finished but not being worked on, plus the 518,000 second hand that they claim are for sale and you end up with something pretty close to 3 million. Incredible. And if I'm not mistaken, those planning approved buildings have to go up within two years or they begin to incur fines. Unless, of course, the law is changed.

Thus, as they say, between them Spanish estate agents, banks, savings banks and private investors are now holding in one way or another a grand total of more than 3 million properties. Wow!

Graham Hunt said...

The more than 1 million with planning permission will never be built. Therefore we are looking at tops 2 million. That is a lot of property.

Right about the emphasis on the coastal strips and I would agree about satellite towns around Madrid, if there are no jobs in Madrid then these towns lack a reason to exist.

I still don't go for the catastrophic breakdown you keep inferring here but the situation is still pretty dire.

Edward Hugh said...

Hello Graham,

Well, you may be right that the properties with planning permission may never be built, but I guess it is a little more complicated than simply signing a waiver, since the projects behind them are already funded and cancelling them would probably need a change in the law and a recognition that most of the builders scheduled to implement them are going to inexistance.

This recognition is still lacking it seems to me, as everyone continues to talk about gradual "recovery" - so you may be right, but the decision not to build them is likely to be quite a traumatic one, and has not been taken yet.

Also, remember that since government civil engineering works are going to be cut back in order to get the deficit under control over the next few years, this will effectively mean very little construction indeed in Spain over the next 5 years or so.

I'm not sure what you mean by catastrophic breakdown. I am simply saying Spain will now need to live from exports, and that since the whole country is in complete denial on this, the road from here to there will be long and hard.

The whole eurosystem will come under pressure from a combination of factors, including Spain, but that is a rather different story, and again, please note, I am NOT forecasting euro disintegration, quite the contrary, I expect another leg in the financial crisis as Latvia comes off the peg, and the Hungarian Forint slides lower and lower, while the EUC and the ECB have to face up to the real costs of funding the conversion of forex loans in the east and the extent of the property related losses that will need funding in Spain and Greece.

Ireland is, of course, largely factored in already, but it is the only one that is it seems to me.

We will ultimately emerge, leaner and fitter, but we will emerge, although we may have a difficult decade or so in between.

Edward Hugh said...

Incidentally Graham,

"I still don't go for the catastrophic breakdown you keep inferring here"

It's OK, Krugman officially declared yesterday, "they end of the world has been postponed".

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ap6aPBj59zLc

The thing is, basically I wouldn't waste the time of day even browsing any analysis at this point that isn't backed by substantial global analysis, and especially of the imbalances, how they fuelled the last boom, and what will now replace them. Until we have this story sorted out, there simply won't get a general global recovery, since we still aren't clear who is going to do the buying.

The next stage here in Europe starts on Monday, as the new German government starts to get their deficit under control:

http://www.eurointelligence.com/article.581+M5163e625404.0.html

and the German economy enters a double dip:

http://www.bloomberg.com/apps/news?pid=20601092&sid=agZcz8dchOKY

Essentially, if it is obvious that if you have to have a hard time either now or later, while those in the South of Europe will always go for the second option, the Germans sometimes choose the first one.

The one million unbuilt properties only serves to dramatise the situation, like the children who weren't born to live in them due to the low fertility, the issue is, what will all the people who were programmed to build them (and those who would work in the bars and restaurants and car factories where they were going to spend their money) now going to do?

This is why we need to urgently build export oriented factories, to soak up the millions who are now left without gainful employment.

Population is undoubtedly the greatest downside risk for Spain in the mid term. Who would have imagined in 2000 that Spain's population could have gone from 40 to 46 million by 2008 (I could, not the exact numbers, but the general idea, this is what global macro is about) and who could imagine now that if we don't start to soak up the surplus labour now in new export driven jobs, then by 2015 we could be back down to 40 million again? I can.

The biggest risk to the Spanish economy comes from an eventual recovery elsewhere in Europe (higher interest rates, and jobs available elsewhere) BEFORE Spain has done anything to correct its problems.

Under such a population flight scenario, property wouldn't recover by 2020, or possibly 2025. A nightmare? Yes! Possible? Yes! Is anyone thinking of doing anything to avoid it? No!

Przemek said...

Hello Edward,

'Who would have imagined in 2000 that Spain's population could have gone from 40 to 46 million by 2008 (I could, (...)'

Could you elaborate?

'Under such a population flight scenario...'

I gather you expect fertility to fall as unemployment makes having babies too expensiev. Do you also expect some of those extra few millions of 'new spaniards' to pack up and go home? Don't you think they rather hang around on welfare in Spain then going back to impoverished LatAm villages?

Edward Hugh said...

Hi Przemek,

"Could you elaborate?"

Well, it's pretty simple really, and nothing to do with fertility, except in the longer term, ie the babies who weren't born between 1975 and 1990. But as all the money was borrowed to do all the building, huge numbers of migrants were sucked in since Spain's labour force simply wasn't adequate. This was globalisation at work bigtime. But now the capital isn't coming in, and the building isn't being done, there are 5 million surplus to requirement workers, and this is why the unemplyment is surging so strongly. And the solution isn't for them all to go home, since the housing market will NEVER recover, and the debt could NEVER be paid off by the much smaller workforce.

I wrote this piece about Ireland a couple of years back, which sort of gets to the problem:

http://edwardhughtoo.blogspot.com/2007/05/macroeconomic-adjustment-in-euro-area.html

"Do you also expect some of those extra few millions of 'new spaniards' to pack up and go home? Don't you think they rather hang around on welfare in Spain then going back to impoverished LatAm villages?"

No, this isn't the point, I expect them to move on to France, Scandinavia, the UK - whichever countries recover first. The Latin American migrants all can have Spnaish nationality - and passports - after two years, the East Europeans are already EU citizens, and the Moroccans can move on to France, where most of them have relatives anyway.

"Don't you think they rather hang around on welfare"

Welfare, what welfare?? This isn't France, Germany, Holland or the UK you know. There is education and medical treatment free, and 420 euros a month maximum. Most of the migrants have families back home they need to send money to.

Edward Hugh said...

My biggest point on migrants is simply that since people simply didn't see them coming, how can they KNOW they won't go away again.

Of course we can all hope. I hope to live to be a hundred. But wouldn't it be useful to have some sort of rational ground for our expectation? This is what I am saying is missing. Meanwhile people are still talking of building yet more flats between now and 2015.

Chistopher said...

Even if 1.1 m properties don't get built, it still leaves 2m on the market. With the natural demand rate for households in Spain at around 300,000 p.a, it's still 6 years before you sell the stock. I'm preparing for a 50% reduction in my modest wealth.

"Catastrophic breakdown"? Depends how you define it. Don't think we'll get a civil war but we are heading inevitably imo for a complete shake-up of the socio-political-economic situation in Spain. When, how and who is a matter of conjecture and I rely on Edward to keep us informed (though I see the PRISA lot are changing their tune now at the eleventh hour). Who will be the first politician in Spain to tell the truth the whole truth and nothing but the truth??

I really appreciate your analysis of demographics in Spain Edward as I believe this also plays a critical role. The 6 mil (15%)construction fuelled population increase from 2000 to 2008, almost entirely through immigration, is going to take some shifting. I agree with Przemec's comment. With Spain's generous welfare program I believe these people are here to stay long-term.

Unless, and here is the big uncertain question, we begin to see radical reforms right through the Spanish system. ¿Dondé esta La Thatcher?

balticman said...

This really is depressing. Is there no one talking about how Spain might develop export industries? With the PP refusing to put forward any positive policies and the Socialists not (in public at least) acknowledging the problems Spain faces , who will lead Spain out of the wilderness? How exactly can Spain begin to recover?

I agree completely about demographics. Spain needs more people. Of course its a recurring theme in Spanish history and just when it seemed that the lost generations may be replaced by immigrants it now seems likely that the last 10 years were a false dawn.

And what would the internal devaluation mean in practice for Spanish people. Does anyone know or are we all just whistling in the dark.

Edward Hugh said...

Hi Balticman,

"And what would the internal devaluation mean in practice for Spanish people. Does anyone know or are we all just whistling in the dark."

Well what we do know is that it won't be easy - just look at Latvia or Ireland. The question is, do we have any other alternative?

All this being said we are really rather whistling in the dark, since there is no clear plan, and at the end of the day it will all end up being pretty adhoc. Strong deflation is never either easy or comfortable, but this is the downside of having the Euro, and you can't take the upside, and then say you don't like the downside.

Valencia Property said...

Thanks for your comments Edward. I take predictions from economists with a huge pinch of salt (Not you of course ;-)) They have been wrong since the dawn of the dismal science an will continue to be so. On a macro economic level the figures are truly horrendous, I totally agree, and Spain needs to export its way out of this of course, the hopes have to lie with renewable energies, especially now that the report so heralded a few months ago about destruction of jobs for each new one created in renewables has been proven to be totally wrong, and also through transport and ICT.

The glimmer on the horizon for Spain and what they hope to build the economy on in the future will always be that Spain is attractive to the rest of Europe as a playground and as prices drop here and the rest of the World gets out of recession then there are constantly more prospective buyers of property to soak up the overhang. A lot will not get sold unless it is given away but the banks (Estate agents now) will stoop that low if it means liquidity. The question is only when.

Just on the point of the 1.1 million homes that i do not think will be built. You say they have been financed. To what extent? Builders and developers usually get stage payments as they complete certain criteria. If they have not been started then they haven't been financed surely!

Regards
Graham

Valencia Property said...

Oh and just one more thing, you said

"cancelling them would probably need a change in the law and a recognition that most of the builders scheduled to implement them are going to inexistance."

I thought most of the builders had gone into non existence already. Let's face it the G14 haven't started 1 project between them this year so far. As for a change in the law, I don't see that this will be a problem in Spain ;-)

Anonymous said...

From Spain:

We are still in the mood of complete denial. There is not either a plan A or plan B. As long as the central and local governments are able to tap the debt market, the current situation will simply keep going on inertia. It can take long, the total public debt ratios are still low on a relative basis.

I am afraid that Spain cannot turn into a exporter country in less than a generation without a devaluation, an scenario out of question so far. There remain only two adjustable factors: prices and employment (I mean unemployment). If prices are able to adjust, the inflation differential with EU could help to boost traditional exports again (i.e., small cars and tourism).

But the question you all put remains open: how long?

JH

Przemek said...

When we talk unemployment reaching 25-30% or to put it the other way around employment shrinking by 15-20% P2P even assuming that less productive jobs/workers are lost the current consensus GDP forecasts of 4% fall this year and another 1% next seem rather misplaced. Aren't we in Spain heading for a contraction of double-digit magnitude?

Daniel in Paris said...

I am afraid that Spain cannot turn into a exporter country in less than a generation without a devaluation, a scenario out of question so far.

This is a fair point. Not a single chance to build significant exports in a reasonable timeframe without a true devaluation. This is of course not enough to drive anything in line with what is required. Let us be clear. The consumption will have to drop massively first. It will be bloody painful. But it does not have to be bloody. Social safety nets can and have to be set up. Over-indebtment as well will have to handled. In a decent manner as well.

A deflationary environment can certainly be an effective and possibly long term cure. But it certainly no fast cure à la British.

A pound below one Euro may bring relief within one year or two. Not deflation on continental Europe.

This is why a massive financial and banking crisis is a potential outcome in spain. That's why alas quite a few of us lurk on this great blog.

Edward Hugh said...

Hi everyone,

Graham:

"I thought most of the builders had gone into non existence already. Let's face it the G14 haven't started 1 project between them this year so far."

Whoof, this is way, way too soon. They are only down to 70% capacity, they will probably need to be down to about 25% before we hit bottom. You need to remember that most of Spain's construction industry is made up of small builders. And they are still building.

According to the latest data from the housing minsitry there were 49,0306 starts in the second quarter. This is still 200,000 a year. Many of these were publicly funded housing, but it is still more housing, and it is still being built. And these people want - I would say need - to keep building at a faster rate in 2010 and 2011, this is the point.

And the town halls need the revenue, so the pressure to build is everywhere.

And the banks need to keep the builders solvent, so ditto.

and

"Just on the point of the 1.1 million homes that i do not think will be built. You say they have been financed. To what extent? Builders and developers usually get stage payments as they complete certain criteria. If they have not been started then they haven't been financed surely!"

Yep, but the bansk have to make provisioning. And that provisioning cannot go to more profitable PYMES before the decision is taken to cancel, and the decision to cancel may mean that the builder goes west, so the provisioning then moves straight over from the project guarantee department to the bad loans one. Either way, no money for projects to get us out of the mess.

Edward Hugh said...

I think the key point to get is that the banks are stuck in a bad equilibrium at this point, where in the short term they can only survive free of government (and EU/ECB) intervention by taking short term decisions that mean they are even more dead in the long run.

My view is it would be a lot better to come out with a white flag and their hands up, but they obviously don't see it like that.

Too much time spent in childhood reading stories about Japanese soldiers who were still found hanging around on Pacific Isalands 30 years after WWII officially came to an end I suppose.