20% of Spanish Mortgages Now Considered To Be High Risk

by Edward Hugh

http://spaineconomy.blogspot.com/

According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become “non performing”. The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted, since prices are now heading back towards the 2005 level, we can easily conclude that something in the region of one in five Spanish mortgages are now high risk.

Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.

The other key indicator for risk of mortgage default is, of course, the proportion of income devoted to servicing the loan. This has risen, according to Bank of Spain data for the second quarter of 2009 to an average of 38.6% of disposable income. This figure is down sharply from the 46% reached between 2006 and 2008 largely as a result of the drop in interest rates. This is the plus side of over 90% of Spanish mortgages being variable interest. The boost to families with mortgages has been significant, and this is evident in the consumer confidence surveys. But there is a downside here.

Spanish households are now extraordinarily vulnerable to any rise in interest rates. Secondly, people feel better because of the improved cash flow situation, but are probably not looking at the capital account side of their personal balance sheet. People with large mortgages and very high LtVs may well be better off by a few hundred euros a month, but the capital value of their investment may be sinking like a stone. In other words they are bleeding out money through the rear window.

One day they will wake up to this, and find they are paying interest on a loan which is worth far more than the property they hold. Then, if there is no change in the bankruptcy law it is off to Australia, Canada or Brazil for many highly educated but heaviliy indebted young people, since as the Spanish law stands there is simply no way out from underneath this for them, ever. That is what those awkward little words “full recovery” mean. Thirdly, Spain is now in deflation.

This means that incomes will go down (over several year probably, if there is not one dramatic year of fall), and property values (which will remember correct against the general price index, that is they will also be further sucked down by the general level of prices) will also continue to fall. So the LtV will rise even as the proportion of income which needs to be paid to service a debt of which so many people were once so proud, but which they now find the be a millstone round their necks, will go up and up an up. Meanwhile Bad loans as a proportion of total credit at Spanish lenders fell the first time in two years in June as savings banks reported a decline in defaults. The ratio fell to 4.6 percent from 4.66 percent in May and compared with a rate of 1.7 percent a year ago, the Bank of Spain said today on its Web site. Bad loans at Spain’s banks slipped to 85.6 billion euros in June from 86.7 billion euros in May and 31.2 billion euros a year earlier. But to put this in perspective, the ratio of bad loans to the total has still tripled to 4.6% over the past 12 months. And the situation is worse than it seems, since according to a study by UBS Spanish commercial banks have clawed back about €10 billion in debt-for-property swaps. And this number does not include Spain’s savings banks who do not disclose the relevant figure. If the position is similar to their commercial peers and we reclassify all these property purchases as bad loans, then the non-performing loan ratio would be 5.7% (before making any further adjustments for the loan restructuring which has been going on thanks to the availability of generous government and ECB funding).

In addition the central bank recently circulated new guidance relaxing the provisioning rules on risky mortgages. Until now, banks had to make provision for the full value of high-risk loans – those above 80% of the property’s value—after two years of arrears. That was obviously far too demanding, since property values rarely fall to zero. However the timing of the change was far from inpeccable, and the new rules, which mean banks only have to allow for the difference between the value of the loan and 70% of the property’s market value, give the impression of massaging rend results. Iñigo Vega, an analyst at Iberian Equities, estimates that the new rules would relieve banks of the need to make provisions of about €22 billion in coming months (assuming non-performing loans only reach 8% by the end of 2010). To put that into context, Spain’s savings banks, which are heavily exposed to developers, are expected to make profits of only €16 billion before provisions this year. As the Economist said, deferring losses to mañana doesn’t change the extent of the difficulties facing Spain’s financial system.

And just to confirm that Spain really is different, surreal almost, this article (in Catalan) explains that the majority of the long term unemployed who have gone to the employment offices to claim the 420 euro monthly payment they thought they had been promised have discovered …… that they are not in fact entitled. Apparently, according to the small print, you need to have run out of benefit and been declared unemployed AFTER 1 August 2009. This is Monty Python stuff, isn’t it?

Martinsa 9 mth loss 10 times worse than thought

Spanish property company Martinsa Fadesa (MFAD.MC) said on Monday it had made a 2.25 billion euro ($2.9 billion) loss in the nine months to September, not 230 million as it originally stated in November.

Martinsa’s revised profit and loss statement showed the firm had written off 2.37 billion euros.

“In July a valuation of assets was not done, and the change in results happened after receiving the valuation,” a spokesman for the company said.

Martinsa was put into administration last summer in Spain’s biggest ever insolvency case. (Reporting by Ben Harding)

Source: Reuters

Tips For Buying A Renovation Project In Spain

More and more people are now looking for a renovation project in Spain, which has plenty of scope for personalisation and transformation.

There is currently a decline in the number of people buying houses on large developments in Spain but it seems that people’s passion for taking on a property renovation project has in fact increased.

As well as being able to control the development of the property another benefit is the financial aspect as ruins are much more affordable and you can also plan the work in stages as and when funds become available.

This suits those who cannot raise the funds to purchase in any other way, those who like the thought of buying cheaply in a weak market and adding real value, and those who no longer feel good about spending money they don’t have in the form of a mortgage.

If it is your dream to find the perfect renovation property in Spain then here are some tips to consider:

•    Think about why you are buying the property and let this guide you. If you’re buying a property to live in, the practical aspects of everyday life will be more important to you than whether the home has room for a pool, which is essential if you a buying a holiday home or rental property. You also need to think about the accessibility of the property, its proximity to essential amenities and services such as electricity and water supplies. Ultimately you need to do research to make sure you have planning permission granted to enable the renovation to take place.

•    Get a reputable lawyer on board to help you find the right kind of vendor. They will also check whether the property is being sold free of any debts or claims against it. The land title needs to be carefully investigated to ensure you’re buying what you think you are, that land boundaries are identified and that there’s no chance anyone can impound the property or lay claims to it in the future, or prevent you from developing it.

•    Look realistically at your finances before you proceed. You will need to be able to afford to buy the property in the first place and pay for the renovation work. Get quotes from builders that include professional fees, final finish and any money you’ll have to pay for planning permission, building regulations etc, then have a healthy contingency budget ready, just in case.

•    Be realistic about how long the entire project will take – and remember it could take months to get the permissions you need to start and secure the services of a builder you  want to do the work.  Anything from the weather to public holidays can and will affect build time, so don’t set unrealistic time goals.

•    Once you’ve transformed your Spanish ruin into the palace you’ve always dreamed of, what are you going to do with it? If you want to let it out you’ll need to market it. If you want to live there permanently have you  sold your UK property? If you want to resell it for profit can you afford to potentially ride out any period of economic downturn that Spain may still be experiencing?

In terms of what is available you’ll be spoilt for choice.  For example estate agent Casas de Lorca is currently selling a house with living space of 200 square metres and 14,000 square metres of land for €105,000 or £83,000. It has incredible views and is in a peaceful location but does need a lot of work. It is only minutes from the motorway though and less than an hour from the coast.

Alternatively, if you are looking for a larger project a 14+ bedroom property which has one large main house and two separate guest houses is available for €695,000 or £550,000. It has 20,000 square metres of land and is ideal for anyone looking for a hotel or business venture.

Source: www.casasdelorca.net

Wish we weren’t here

Source: http://property.timesonline.co.uk/

Ten years ago, Ian Anderson, a builder of tennis courts and swimming pools, moved to France. Like many Britons dreaming of a new life in sunnier climes, he bought a property in need of renovation – in his case, a roofless wreck of an 18th-century farmhouse in the Luberon hills, near Aix-en-Provence – and spent three years transforming it into a comfortable home. In the course of the work, he added open fireplaces, 30 stone-framed windows and a heated outdoor pool.

Recently, Anderson, 63, who lives with his wife, Thea, 55, an air stewardess, decided to put their house on the market. “It seems a good time to resettle in the UK near my grandchildren and friends,” he says.

Global economics, as well as family considerations, have played their part. The €1.38m that Anderson hopes to get for his property, which is on sale through Winkworth France (020 8576 5582, www.winkworth.fr), would convert into about £1.25m at the current exchange rate – compared with £1.03m this time last year. A further incentive to sell is the fact that the property market in southern France, although slowing, is not falling nearly as fast as in Britain, which means the proceeds of the sale will go even further back home. Anderson, who paid £50,000 for the property and spent more than £500,000 restoring it, is looking for “something rural and in need of help, in Herefordshire or Glouces-tershire, for about £250,000”.

Meanwhile, Hadleigh Bolt, 29, a property developer, is planning to exchange the charms of southern Spain for those of the Surrey commuter belt. “I moved to Marbella seven years ago when I saw opportunities to build high-spec villas at La Zagaleta Country Club, with prices ranging from £5m to £30m,” he says. “Now I’m seeing the same kind of opportunities back in England, on estates such as St George’s Hill, in Weybridge, Surrey, as I can take advantage of the currency swap and falling UK housing market.”

This summer, Hadleigh expects to move, with his wife, Natasha, 34, and their three children, into a six-bedroom house with a pool, a gym and a home cinema in St George’s Hill for about £2.5m. “This is the kind of thing we develop,” he says. “We knock down existing houses and rebuild. Other UK-based developers usually snap these houses up, but they’re having problems getting the finance. We have the advantage of going back with cash and being able to tie up the deal within 21 days.”

Many other Britons who have bought abroad over the past few years believe now is the time to cash in: in the past 12 months, the pound has fallen by 18% against the euro and by 28% against the dollar, which, coupled with plunging house prices at home, could mean they will be able to swap that farmhouse in Chiantishire, finca in Spain or flat on the Mediterranean coast for as much as 50% more property back home.

HiFX, a specialist foreign-exchange broker, says the number of its clients changing the proceeds of property sales from euros into pounds has doubled in the past year and the number swapping dollars for pounds has risen by 120%. “This marks the first significant wave of Brits coming home since the overseas property market took off in France and Spain 20 years ago,” says Mark Bodega, the company’s marketing director.

Property in Britain is also looking increasingly attractive to expats who intend to continue working abroad for some time, but are tempted by prices that, in the foreign currency in which many are paid, are the cheapest they have been for several years. Savills estate agency reports particular interest in West Country property from buyers based in Canada, Abu Dhabi and Hong Kong.

“Family houses costing upwards of £725,000 are particularly popular among expat buyers,” says Andrew Cronan, of the agency’s Bath office. “We’ve just sold one in the Somerset village of Chil-compton, and a townhouse in Bath, to expats who will rent them out until they return to the UK in five or 10 years.” The Cirencester office also reports interest from Britons based overseas who are entering the market for the first time. It says demand is mostly for family houses in good villages for about £1.25m.

Adrian Wright, who runs Weybridge-based International Mortgage Plans, which specialises in finance for expats, says he is “snowed under” with inquiries from Britons wanting to buy back home. “People who are paid in dirhams, dollars or euros are cashing in on properties costing 70% of what they did last year,” he says. “You try finding a £1m family house in nice areas of Surrey such as Weybridge or Esher.” Their ranks are being boosted by those who took jobs in Dubai and – now that its economy is also faltering – are moving back to Britain in search of work.

This same combination of a weaker pound and falling British property prices is encouraging some of those who bought holiday homes and other “fly to let” property abroad to sell up. Jonathan Cunliffe, head of Savills’ Truro office, says he has come across a number of buyers who have sold second homes on the Continent and gone househunting in Cornwall. “They would have bought in Mallorca or the south of France, but are put off by the steep falls in sterling,” he says. “By buying in England, they are effectively seeing a 40%-50% discount from the 2007 peak.

“The £1m-plus market is the most active, and people have moved away from looking at secondary locations. They are back to wanting prime water-front or water-view properties in places such as St Mawes, Fowey or Padstow.”

Other sellers, such as Gordon and Nicola Green, both teachers from Bolton, have decided to plough the profits from foreign property investments into their main homes. Two years ago, they bought an off-plan one-bedroom flat overlooking Kotor Fjord, in Montenegro, for £70,000. They sold it in December for £127,000.

“We rented it out for the whole of last summer, and planned to use it ourselves this summer, but we were unsure where the market there was going, so we put it up for sale,” says Gordon, 36. “It went within two months to a British buyer. We dropped the price by €10,000 (£9,000) to grease the sale, as we knew we would make up the difference on the exchange rate. Now we can use the proceeds to fund an extension on our three-bedroom house.”

Jon Carn, 40, a sales manager from Sutton Coldfield, in the West Midlands, has also decided now is the perfect time to sell the one-bedroom flat he bought five years ago in Nice for €122,000 (about £81,000 at the time). He has put it on the market for €190,000 (now about £172,000) through Chez Riviera (0800 077 6510, chezriviera.com), but he, too, is prepared to be flexible over the asking price.

“We’ve started a family, so we wanted to get a bigger property in the UK, and now is the perfect time to get something at a rock-bottom price in England by using the capital from the sale of our French home,” says Carn, who lives with his wife, Leanne, 32, and their 22-month-old son, Joel. They are hoping to upgrade from their two-bedroom flat to a three-bedroom house with a garden in the same area, paying about £225,000. “The exchange rate has given us a flexibility we didn’t have before,” he adds.

While the Côte d’Azur’s continuing appeal to a wide number of nationalities should make it easy for Carn to sell, those trying to dispose of property in regions that rely heavily on British buyers, such as the Dordogne, Tuscany or the Algarve, could struggle. The markets there suffered badly during previous downturns in Britain; it is unlikely to be different this time.

The sums are also not looking so good for those who have bought in Spain, where the economy is faltering and the property market is in even poorer shape than in Britain – even if the pain of lower prices is being partially mitigated by the strength of the euro. During a visit to expatriate communities on the Costa Blanca last week, Gillian Merron, minister for consular affairs, said that many of the estimated 1m Britons who live in Spain found it difficult to cope when hard times hit and “the dream turned sour”.

Phil Sainsbury, 42, was among them. He has just moved back from Javea, on the Costa Blanca, to Kent because his work as an insurance broker was dwindling in the Spanish downturn. “We have put our villa on the market for €450,000, but it’s the wrong time to sell,” says Phil, who is renting a two-bedroom flat in Arterra, a new development in Faversham, which he will buy for £130,000 in six months when he has built up a sufficient credit rating.

His wife, Hayley, 32, has remained in Spain with their two-year-old twins, Max and Tom, and their five-year-old son, Harvey, while they try to sell their seven-bedroom villa. “I’ve put a lot of money and effort into the house, digging out the basement to create four bedrooms and building a pool, so I don’t want to discount the price too much,” Phil says.

Terence and Heather Sharkey, meanwhile, have abandoned their retirement in Spain after seeing their pension fall in value by about 25%. “The cost of living had become too high, and we found it hard to settle, with Heather wanting to go back to work, but unable to find a job in Spain,” says Terence, 68, a retired industrial air-conditioning engineer.

The Sharkeys have left their two-bedroom villa in Torrevieja, near Ali-cante, and bought a two-bedroom flat for £105,000 on the Maple Tye development in Stowmarket, Suffolk. “The asking price was £138,000, so we got a good deal, and we still go to Spain for holidays,” says Terence. “There’s no point staying if you’re not both of the same mind.”

— International Mortgage Plans; 01932 830660, international-mortgage-plans.com

Back to Blighty: what to buy once you’ve cashed in those euros

— Sell your five-bedroom house in the Tarn-et-Garonne, France, and get…

A five-bedroom detached house with lawned gardens is near the centre of the North Yorkshire market town of Ripon. £499,950; Beadnall & Copley (01765 698100, beadnallcopley.net)

— Sell your 13th-century castle in a woodland estate in Tuscany and move to…

Another one in Orkney. Balfour Castle sits in a 770-acre island estate and has 14 bedrooms and a secret passage from the dining room to the library. Offers over £2.7m; Savills (0131 247 3700, savills.com)

— Sell your seaside flat in a gated development on the Costa de la Luz, Spain, and buy…

A recently refurbished one-bedroom ground-floor studio with parking in St Ives, near the sandy beaches of the north Cornish coast. £139,950; Miller Countrywide (01736 797331, www.millercountrywide.co.uk)