Eurpoean Citizens' Half year report

Had the following forwarded to me, I have no idea of the originating source unfortunately.

HALF YEAR REPORT 2010

Looking back to see forward

In the Yearly Report 2009/2010, which we sent our subscribers in January, we made the following predictions for this year:

“Our predictions and recommendations for 2010

There are certain positive signs for 2010, but also a number of negative ones. Let us first look at the positive signs:

- The international financial crisis is abating, even if in no way has it passed. The economy of a number of countries is improving and this will have a certain effect also on Spain.
- The stock exchange in Spain rallied over 2009 and it will certainly continue into 2010. However, the latent problems in Spanish banks may send the stock index down again.
- A continued reduction of the Euribor interest rate index during 2009 has reduced the repayments for clients with high mortgages. If the inflationary pressure starts up again in the northern EU countries, the European Central Bank may be forced to raise the interest rates.
- The general mood of the Spanish is improving and they believe that the situation will improve.

The negative signs by far outweigh the positive one:

- A great number of small and medium companies will collapse, and this may be followed by some big ones as well.
- Due to high prices and a number of interesting offers from other destinations. tourism to Spain will not be able to recover the ground it lost over the past two years,
- The number of dwellings constructed will be radically lowered, but even a reduction of 50% (going from 200,000 to 100,000) will not make a great impact on the enormous stock of dwellings for sale.
- Promoters and banks will try artificially to hold up prices for dwellings, but may be forced into substantial reductions by the end of 2010.
- Because of the catastrophic situation in the property market and Spain continuing to ignore the recommendations of the European Parliament in the Auken report, foreign property buyers will stay away from Spain.
- After Prime Minister Zapatero ends his presidency of the EU during the summer, he may come down from his Olympus and find the coffers of the state, the regions and the municipalities absolutely empty. He will accelerate the increases in taxes and charges.”

I think our readers will permit me to say once more that our crystal ball has been functioning. Our predictions of six months ago can today be read as a résumé of what has in fact happened. And the rest of the year? It will continue as it has started!

Will foreign property buyers come back?

By Per Svensson

Since the air in the Spanish property bubble started to seep out in 2007, the developers and property agents have been asking themselves when will the foreign buyers come back to Spain? Always the answer has been: in a few months ……. Now 3 years have passed and less and less private buyers have appeared, and more and more foreign owners have been trying to get rid of their home in the glaring sun.

The correct question to ask today is not when will the foreign buyers return to the Spanish property market, but if they will be back to take the enormous glut of dwellings for sale, off the shoulders of the developers and the banks. I personally sincerely doubt it will happen. In the following, I will explain my reasons for this prediction.

I. Built for the middle classes

The great majority of the dwellings built during the boom years were built for sale to the European middle class. 80% of them are apartments, with an average of two bedrooms, with 60 to 70 m2 living space, located in high rises or long and compressed lines of terraced houses. Most of the developments are situated far from the beach, it seems the Mediterranean coast has crept 40 to 50 kilometres inland….

Even if the developers had been promising big swimming pools, a golf course for every 2,000 dwelling, many palm trees, and had given the projects exotic names and maintain it is great luxury, the upper classes would not want to be seen in such places.

II. Shoddy workmanship

Most of the dwellings erected during the boom were built in great haste, by immigrant workers labouring hard, but with little education and experience in the building trade. The architects were told to include some Moorish arches or Roman columns, aluminium and glass on the facades. But all too often they forgot to widen the staircases, make sure the rainwater flowed away from the terraces and entrance doors, did not insulate against noise in the dividing walls between dwellings; nor install the “hanging floors” which diminish transmission of sound from apartment to apartment and they did not including floor heating under the beautiful tiles, very necessary on a cold winters day.

Luxury construction? Far from it, more like instant slums. Many of the weaknesses in this mass construction have now started to appear, especially in the dwellings which may have been standing empty and unattended for two or three years.

III. Unfinished infrastructure

In some of the developments, where many dwellings remain unsold, or where the developer has gone broke, the infrastructure has not been finished for obvious reasons. Roads and parking areas are missing, as well as the planned swimming pool and the gardens. Potential new buyers should beware when buying a dwelling in such a complex, they will be charged for the cost of finishing the infrastructure and so an apartment with a low price tag may become a very costly dwelling in the end.

The developers and banks, who own the unsold properties, may also try to duck their legal responsibility to contribute to the Communities of Owners for maintaining the common elements, leaving the expenses to the private owners. Taking a developer to court for not paying his part, may be difficult if he has gone to Congo (Brazzaville) to start construction there …….

IV. Inflated prices

Since 2008, property prices in Spain have fallen 20 to 30%. In the tourist areas, sometimes even more. And some of the dwellings, offered at up to 50% discount, have serious legal and/or technical problems, or are situated in places where no one would want to live.

Experts agree that property prices, for third-rate constructed properties in Spain, are still too high. Some are expecting the falls in value to continued at the end of this year. As the stock of unsold dwellings in the hands of promoters and banks continues to grow, and deteriorate with every year they stand empty, the value of the properties fall.

The Bank for International Payments (BIS) have published a study where they warn that prices for Spanish real estate may fall 75% over the next 40 years, also due to the aging of the population.

A large part of the price of properties in Spain is not for the bricks, cement and labour costs, but the speculative profits. The plot represents more than half of the price of the finished dwelling, meaning the speculation in transforming farmland to approved building land.

V. Natural paradises lost

There were many natural paradises on the Mediterranean coast and the islands of Spain. Greedy developers and corrupt politicians have managed to destroy much of that natural beauty, replacing it with concrete and asphalt. The mayors have permitted construction in many protected areas. The quaint villages have been transformed into bustling metropolises, where almost every square meter has been used for construction, and where parks and parking areas have been forgotten.

With the huge debts accumulated by the town halls, we should not expect they will be able, or willing, to improve or repair the missing infrastructure. Increased local taxes will be spent on lush salaries for local politicians, not on filling the potholes of the urbanisations outside the town centres.

VI. Urban planning abuse

Due to the frenzied activity of the promoters to find suitable places for transforming farmland to building land, many small property owners have become prisoners of ambitious and costly urbanisation projects, forced to pay the inflated costs of planning and infrastructure, often loosing part of their property. Other buyers have found that the property they bought or built in good faith is illegal, and some of them now having to pay substantial sums to get out of the situation, or risk having their homes bulldozed.

Tens of thousands of complaints have been presented to the European Parliament, which has, on three occasions, sent investigating commissions to Spain, and approved reports of urban planning abuse, lack of legal safety and destruction of the environment, especially in the Valencia Region. Both the National and Regional Governments in Spain have ignored the reports and their recommendations.

VII. Lack of respect for European citizens

Spanish politicians, whilst supporting Europe as long as there were any funds to squeeze out of Brussels, have shown great disrespect for their European citizens. The Europeans in Spain have been treated as fiscal milk cows with limited citizens' rights. The Government sabotaged their voting rights in local elections for a long time, accepting it only when forced by European Directives and when they thought they could benefit from their vote.

Lately the rules for residing in Spain, or registering on the ‘padron’ have become very restrictive, and many town halls have been busy deleting European citizens from the lists of inhabitants. The intentions, to set up a system of information available to foreign buyers and owners, were sabotaged, certainly after pressure from the developers, who preferred uninformed property buyers.

Back to the middle classes:

At the beginning of this article, we maintained that the great majority of unsold dwellings were constructed for a fast sale to the European middle classes. The upper classes, the real rich, would not buy them or live in them. Mostly, they already have their Shangri-La away from the crowds, preferably outside Spain and even beyond Europe.

But in all the countries where traditionally the buyers for a home in the Spanish sun were to be found, the number of families in the middle class has reduced. Many middle class families have descended into relative poverty, whilst others have become really rich, with the tastes and preferences of the rich.

The financial crisis over the past two to three years has accelerated this trend: There are more rich people, and they have become richer. The number of families living below the poverty line has increased sharply and the middle class has shrunk, with many of the families in this segment now living under the threat of unemployment and a further reduction in their standard of living. In the present circumstances, they will not be considering buying a property abroad.

Taxes and charges on the middle class, to pay for the speculation and mistakes of the banks, are increasing in all the northern European countries. Plans are afoot to raise the pension age and shift more of the expenses for health onto the consumer.

Also, the value of their dwellings in their home country have fallen, compared with some years ago and, therefore, cannot so easily be used as collateral for house purchase in Spain.

Going home

Hundreds of thousands of foreign property owners have left Spain, or are preparing to do so, for their home country or for countries where the Euro, Pound or Krone may stretch further. Their problem is the lack of buyers for resale properties in Spain. Some are willing to sell at a considerable loss, especially those who bought at the inflated prices during the past years of the boom.

If property prices in Spain fall a further 20 to 30% at the end of this year or next, crafty sales people will shout from the roof tops: Now is the time to buy a property in Spain! They will try to make the reduced number of possible buyers for the middle class forget the sad experiences of the foreign buyers over the past decade. This will be a difficult task, with an army of damaged and deceived owners having returned to their home countries, telling their stories of Spain, and the foreign press being alerted to the frauds and abuses inherent on the Spanish property scene.

Spanish property: 'There's a lot of over-priced rubbish out there'
Despite a huge glut of property on the Spanish market, there are few real bargains to be had. And even fewer good investments

Patrick Collinson
guardian.co.uk, Friday 16 July 2010

Speculative building in the boom years has left Spain with a huge property glut but asking prices are still mostly unrealistic.
Torrevieja is the Spanish resort that exploded in size as Brits snapped up apartments and villas as frenetically as the developers knocked them out. But the town dubbed the Costa del Yorkshire is now better known to the Spanish banks as the home of the "British plumber mortgage", and knee-deep in negative equity as properties that once sold for €200,000 (£167,000) are now fetching as little as €60,000 (£50,000).
Don't expect a rebound in prices any time soon. The Costa Blanca was the most over-built region of Spain during the boom years, and a glut of property estimated to be as high as 1.2m units across the country will take many years to shift.
"There's an awful lot of rubbish out there that just won't sell at any price," says Martin Dell of kyero.com, a website that lists 100,000 Spanish properties for sale by 1,500 estate agents. "There's huge developments on golf courses miles from anywhere, and bad-quality apartments in poor locations with no local amenities. When they talk about 40% or 50% discounts, even at that price they're not worth it."
Desperate Spanish banks have started to offer 100% loans to anyone who will take distressed properties off their hands – and the buyers don't have to make a single repayment for three years. The 100% deals (on mortgages priced at about 3.5%) are for Spanish residents only, but they will give British buyers loans of up to 80%.
Andy Fox, who runs spanishbankproperty.com, acts as an agent for lender Bancaja and has access to 20,000 distressed and repossessed properties. He points to developments such as one in Adra near Almería, where prices on apartments that have never been occupied since being erected two years ago have plummeted from €150,000 to €74,040. And he is marketing a one-bed apartment repossessed by Banco Santander in a resort near Villamartin for €43,000 (£36,000).
But even he hesitates to describe prices as bargain-basement. "Please don't stick the word 'investment' on these properties. It's only a great time to buy if you are not interested in making money. Don't expect anything to jump in value, possibly for years."
British buyers, once the kings of the Costas, are now thin on the ground. During the boom, the British made up about 70% of the foreign purchasers along the Spanish coast, with stories of plumbers and taxi drivers buying three, four or five apartments at a time, often with large euro-based mortgages attached.
According to Mark Stucklin of SpanishPropertyInsight.com, the number of transactions has collapsed. One set of figures this week suggested that in the past six months only 500 homes have been bought by non-resident buyers across the whole of Spain. But Stucklin recommends taking such figures with a large pinch of salt. "There are few reliable statistics and indices. They are often based on asking prices which are vendor fantasies," he says.
The only figures that are reliable are those for transactions, which have fallen to 33,000 a month nationally, compared to 70,000 a month at the peak.
"The market has shrunk but it has stabilised," Stucklin says. "There is still a huge glut of unsold property that needs to be mopped up. The market is digesting the surplus stock in Madrid and Barcelona but elsewhere it will take a lot of time.
"We are seeing the Germans and the Nordics emerge as buyers in place of the Brits. The Germans withdrew during the boom, while the Brits paid top euro. Now the Germans are coming back," he says.
Official figures from the Spanish ministry of housing say prices have fallen nationally by only 11.2% since their peak. But indices from the two main domestic property websites, Idealista.com and fotocasa.es, suggest a fall of about 22%. "This seems to be a fair indication of reality," Dell says, but he adds that asking prices remain in many cases "bonkers".
Don't offer the asking price
Don't even consider putting in an offer on a Spanish property that isn't 25-30% below the asking price, Dell says. "There's some evidence that the decline in prices is tailing off, but we could see perhaps another 5%-10% off prices over the next year."
Rating agency Fitch forecasts that the Spanish property downturn will run until 2012, with prices falling 30% from their peak. In the boom, Spanish property prices across the country reached an average of 7.7 times local income – double the average between 1995 and 2000. That suggests that they may still have a long way to fall before they reach realistic levels.
"If you are looking for an investment, don't buy a Spanish property. But if you want to live in a hot country and are buying a property to occupy for many years, then it's an OK time to buy," says Dell.
Both Dell and Stucklin warn buyers to be cautious about the many websites now offering British buyers distressed and repossessed properties.
"Until very recently Spanish banks had to offer repossessions to the market at the initial valuation price. New legislation means that they have to write down values and take off some of the ludicrous valuations, but in truth they still remain overpriced and I expect many to eventually become social housing," says Dell.
The Costa Brava south of Alicante, which includes Torrevieja, has seen the broadest price declines but Dell says you have to head to the Costa Cálida in Murcia for the biggest price reductions.
Stucklin says prices remain firmest in upmarket resorts in the Balearic islands, Marbella and Sotogrande, where over-building was not on the scale of the Costa Blanca. He recommends a development in Sotogrande called Ribera del Marlin, marketed by Savills, where prices for two-bed luxury apartments have come down from about €595,000 (£497,000) to €410,000 (£342,000).
The lesson from the boom is an old one: location, location, location.
"Identify a desirable location where you really want to live. Make sure it has good views, and is not half an hour from a beach but more like five minutes, or that it's walking distance to the shops and restaurants," says Stucklin.
And don't rely on holiday rental income to cover the cost, says Fox. "During the boom the estate agents were telling people that the rental income would be fantastic. But with the fall in sterling the British just aren't coming in the same numbers.
"A lot of people bought off-plan in developments where they were promised a whole load of facilities, but they were never built," he adds. "It has been a nightmare for them."

Money Week/Open Europe: 26/07/10:
Stress tests

The European bank stress tests were a whitewash, of course. You'd have to have been particularly naïve to expect anything else.
It's almost disappointing. I had a vague idea that the test results might be like one of Gordon Brown's budgets. You know the sort of thing - a glossy sheen of half-truths and not-quite-outright-lies disguising the true horror of the underlying economic situation. A roll-call of good news to distract the attention, while all the bad stuff and caveats are buried in the small print or left to the imagination.
But to put it bluntly, Europe's regulators didn't even try to pretend that this was a serious exercise. Out of 91 banks, just seven failed. And those were the ones we knew were in a mess already.
So what are we meant to make of all this?
The stress tests failed
Seven of the 91 banks stress-tested by the European Union failed, and need to raise €3.5bn in total between them. That's enough to tell you that the tests were too soft. That €3.5bn was "about a tenth of the lowest analyst estimate", reports Bloomberg - and analysts tend to be on the optimistic side. Barclays reckoned the banks might have needed to raise as much as €85bn.
Five of the seven failures were Spanish cajas, which everyone knew were in trouble and Spain has already planned to recapitalise. Germany's Hypo Real Estate was another well-broadcast failure, which is already owned by the state. And there was one Greek bank, ATEbank, which is part-government-owned.
In short, as Richard Cranfield of law firm Allen & Overy put it: "Arguably the failure here is not the banks concerned but the test itself."
Where the tests went wrong
So what was wrong with it? Well, as Wolfgang Munchau writes in the FT this morning, that there were three main problems. First, it left out some important institutions. That's perhaps excusable.
Secondly, the stress test was looking for a tier one capital ratio of 6%. This is the amount of capital that a bank holds compared to its total assets. It's a core measure of how financially strong a bank is. The idea behind tier one capital is that it provides some protection against unexpected losses, before a bank has to raise any more money from taxpayers or the markets.
But there's a problem here. As Robert Peston noted in a recent blog on the BBC, the calculation used by Europe's regulators includes "various forms of capital that the recent banking crisis showed were more-or-less-useless for absorbing losses." So on this basis, the tier one capital ratio is probably overly generous.
But there's a third problem, much more important than either of these. Remember why we ended up getting the stress tests in the first place? Oh yeah - it's because Greece was on the verge of going bankrupt. And everyone was a bit worried as to what impact that might have on European banks' fragile balance sheets.
So you might think that a credible stress test would have come up with some way of, well, testing for this scenario. No chance. As Munchau notes, "there was no provision for the possibility of sovereign default… this is like a car crash tester failing to consider the possibility of an oncoming vehicle."
The stress tests only assumed a further (relatively small) fall in the value of government bonds that banks hold for short-term trading. The ones that they plan to hold to maturity were unaffected.
That makes sense on the one hand. After all, day-to-day fluctuations in bond values are irrelevant if you plan to hang on to them until they are redeemed. But if a country defaults, then the problem is that they won't be redeemed. And this is what the stress tests completely failed to test for.
The tests we really need won't happen
As Chris Whalen of Risk Analytics told The Telegraph: "Everyone knows that is a sovereign story. These tests are a political exercise that tell us nothing useful. You have to test the states themselves for solvency."
Unfortunately, that's not going to happen. Because the EU doesn't even want to admit to the possibility that a eurozone country might default on its debt. We'll be looking at the stress tests and the state of the banking sector in other developed markets in more detail in the next issue of MoneyWeek, out on Friday. If you're not already a subscriber, claim your first three issues free here.
As for what this means right now - the euro is pretty flat against the dollar, while European stock markets are pretty flat too this morning after an earlier surge. I suspect it won't be long before the tests start being picked apart.

What happened during the summer?

What has happened during this summer season, now ending?
No political or financial earthquakes, but a few things worth taking notice of:

The Catalan “Statute”

A couple of years ago, skating very close to declaring independence for the unruly Region, the Catalan parliament approved a text dealing with the relationship between the Region and the Spanish State. The text was presented to the Constitutional Court, which after a long period of deliberation, has found that the Catalans have crossed the line, on 14 points, on what the Spanish Constitution permits. The political parties in Catalonia mobilised a million supporters to demonstrate in favour of the statute and the Catalan interpretation of themselves as a Nation.

In the National Parliament the socialist deputies, both from Catalonia as well as other parts of the country, presented a resolution which was approved, promising “political actions” to preserve the self government of the Catalan citizens within the framework of the Spanish state.

“Dark” government in Fuengirola

In a report by the organisation Transparency International, Fuengirola (Malaga) town hall was named as the least transparent in Spain. The town, governed by PP Mayor Esperenza Oña, refused to supply information requested by the organisation and consequently was classified as the “darkest”.

The Government demands money back from regions

The National Government is trying to collect all outstanding debts, including those of the Regions, which owe 5,700 million euros, which they received as an advance in 2008, and another 20,000 million in 2009. The law demands that such advances be repaid in within 5 years, but as the Regions do not have the money they have asked for the repayment period to be extended to 10 years, but the Government has refused.

According to Bank of Spain, the municipalities have debts of 36,085 million euros. At the end of May the Government prohibited them from acquiring new loans for one year from the end of this year. The municipalities are protesting, they have lost a large part of their income due to the crisis and must have new loans to re-pay the existing ones. Madrid City owes 7,300 million euros.

Man killed by “burning bull”

Following the decision by the regional parliament in Barcelona to prohibit bullfighting in Catalonia, a man was killed by a “burning bull” at the beginning of August in Godella (Valencia). The traditional “fiesta del toro embolado” is a festive event in which bulls with a burning container between their horns are let loose in the streets of the town where everyone can chase them, or be killed by them.

Fraud as normal

Since 2003 Carlos Fabra, the historical leader of the Partido Popular in Castellon, has been under investigation for influence peddling and defrauding the Tax Office of 1.7 million euros. The prosecution is demanding prison sentences of 20 years and 3 months and 13 years, respectively for him and his wife.

Fabra has retired from his position as President of the Castellon “diputacion” (association of municipalities in the province).

Four people have been arrested in Villanueva de Concepcion (Province of Malaga). They and the “independent” mayor are being investigated by the Guardia Civil in connection with urban planning abuses. The “guardias” closed the offices of the town hall and seized half a dozen boxes of documents.

The police have detained the councillor responsible for infrastructure in the municipality of Orihuela (province of Alicante) and many documents have been seized. This case may be connected with the adjudication of the rubbish collection contracts in the municipality. Joaquin Ripoll, president of the “diputacion” in Alicante, and leader of the Partido Popular in the Province, was also taken in for questioning, presumably in connection with the contracts for rubbish collection.

Scottish actor Sean Connery and his wife are accused of tax evasion following the sale of land in Marbella and Malaga City.

Most hated persons

In a recent public opinion poll conducted by the leading newspaper “El Mundo” was asked who were the most appreciated and most hated in Spain. Most appreciated were sports personalities, lead by tennis player Rafael Nadal (69.9% of the votes) and national goal keeper Iker Casillas.

Josep LLuis Carod-Rovira from the party ERC (that is part of the government coalition in Catalonia) with 72,5% was the most disliked. He was followed by TV “personality” Belen Esteban, Leire Pajin (number 3 in the socialist party) and then Joan Laporta (president of football club Barcelona). Prime Minister Jose Luis Rodriguez Zapatero was voted 5th most unpopular.

Multilingual Senate

The Spanish Senate has changed its rules, to make it possible for all Senators to speak and be spoken to in any of the 4 official languages of the country (Castellano, Catalan, Gallego and Euskera). To make this possible, an expensive system of simultaneous translation has been installed. All Senators speaks fluent Castellano.

Hard landing for air controllers

The air controllers are at it again. At the beginning of the tourist season 46% of them went on sick leave at the El Prat airport in Barcelona. The Government check found that at least 66.34% of them were fit to work. Military controllers were called in to ensure the service was uninterrupted.

In the beginning of August, the air controllers called a national assembly to decide whether to go on strike. Although they decided to strike, a definite date was not agreed upon. The airport authorities have submitted an offer to pay the controllers an average yearly salary of 200,000 euros.

Greenpeace: Destruction of the coast

The environmentalist organisation Greenpeace has published a report on the destruction of the Spanish coast, in which they stress that the country is still redesignating 7.7 hectares of farmland every day as building land for housing, industrial and commercial use. Over the past 20 years the equivalent of eight football fields have been destroyed every day.

Between 1990 and 2000 the population of Spain increased 5%, but the number of property developments grew 25.4%. In Andalusia 59% of the coast is classified as building land. In the Valencia Region, there is a harbour/marina every 11 kilometres.

Car sales down 24.1%

As we predicted, car sales dropped radically after the state support on new purchases ended and the increase in taxes took effect from June. July saw a decline of 24.1% in new purchases compared with last year. The association of car dealers say, “Things will get worse.”

From torrential rains to sweltering heat

The torrential winter rainfalls have given way to a summer of heat waves. In both July and August, the Meteorological Agency (Aemet) issued warnings of temperatures from 35º to over 40 degrees in many provinces. Two people have died as a result of the temperature.

The Meteorological Agency has presented a projection of future climate changes in Spain, with maximum temperatures going up 3 to 6 degrees by 2071. The President of the agency commented, “In some years, the climate of Madrid will be the same as that of Seville today, and the climate of Seville will be similar to Tucson, Arizona.”

Immigrants emigrate

Foreign immigrants are loosing their jobs and leaving Spain. In 2009, ninety thousand immigrants, brought into Spain to help in the construction hysteria, left the country. The trend continues, with 123,000 foreign workers losing their jobs between March 2009 and March this year.

There are still 3.6 million foreign workers in Spain, this is 15.8% of the total workforce, the highest figure in the European Union.

Paying for medicine

Six regional governments have proposed that pensioners with a yearly income above 21.500 euros should pay part of the costs of the medicines they receive. Madrid, Catalonia and the Valencia region want to go further by charging for each visit to a medical centre, to reduce waiting times and avoid abuses of the health system.

Limits on EU mobile calls

The European Union has, with effect from 1st July, established limits on Inter-Europe mobile call. When a client has reached costs of 59.50 euros, the phone company must break off the connection and may not continue to charge. After 80% of this sum has been reached, the company must send a warning to the client. From the same date, the costs of calls over another network, other than the home one, within the EU is reduced to 80 cents per megabyte, from the previous 1 Euro.

Building sector –
still falling

In 2007, Pedro Solbes, then Vice-President of the Government and Minister of Economy, said, "There are no reasons to fear a sudden burst of the so called property bubble…”

Prime Minister Rodriguez Zapatero applauded him, as did all the property developer representatives, constructors, agents and their hangers-on.

Solbes continued to repeat this until the fall of 2008, when the construction sector collapsed.

Today, the result of the incompetence of politicians and leaders of the construction sector is apparent:

- Housing starts are down to between 50,000 and 75,000 units per year (from the 700,000 in 2005).

- There is a 3 million stock of unsold dwellings (finished new dwellings, dwellings under construction or planning and re-sale dwellings).

- Property prices have fallen 20% since the property bubble burst; even more in certain areas and experts predict a further fall at the close of this year or the beginning of next.

- More than half of the property agents have closed their offices and sales agencies abroad are busy offering properties located in Turkey, Brazil or Morocco.

- The building sector crash pushed million of workers into unemployment, total unemployment is now at 20%, despite a weak tourist season improvement and experts expects 700,000 new jobless in October – November.

- The property sector owes 32,982 million euros to Spanish banks, notwithstanding that the banks have been forced to take possession of many of the overvalued dwellings. The situation threatens the survival of the financial sector in Spain.

Our repeated warnings

In 1995, 221,252 new dwellings were constructed in Spain. In 2000, 415,793, and in the following boom years construction really took off: 505,174 new dwellings built in 2001, followed by 519,686 in 2002 and 506,349 in 2003. With plans for 800,000 dwellings stamped by the architect's college in 2006; the building sector had changed into top gear, continuing until the collapse in 2008.

Looking through our reports to members, we are able to show we had another (and more correct) view of the situation.
At the end of 2004 we wrote:
“….2004 registered the first signs of exhaustion in the property boom. Sales are declining or taking longer, prices are not as vigorously up as previously and in certain areas have started to fall. But due to the long gestation time of a property project, the number of new dwellings started up and coming on the market in 2005, will be very high, probably around 500,000.”

We were of course ridiculed for our warnings by the property sector and the foreign language publications, living on the advertising revenue of the sector.

During 2005 we repeated our observations on several occasions, and warned our members against financing with variable interest loans, cautioning that the interest rate would rise! This was at a time when banks were telling us not to worry!
In the 2006 Yearly Report, written at the end of 2005 and sent our members in January 2006, we asked the rhetorical question, “Is the drop in foreigners purchasing property in Spain,” which we had reported on several times during 2005, “ a temporary one?” Our answer was:

“Promoters and sales agents are hoping the drop in sales is temporary and that the market will recover. We do not share their hopes! The high prices do not allow for any appreciation value and have driven investors into the stock market or to other countries where property and the cost of living is still cheap. The massive construction programs with building cranes everywhere is not attractive to retired people seeking tranquillity. The urban planning abuses committed against small landowners, promoted by the LRAU and LUV-laws, have scared many buyers away. Greed and corruption has damaged the reputation of the country. Spain has lost much of its attraction.
All signs point to a deepening and prolongation of the crisis in the Spanish property market.”
At the beginning of 2007 we published a recommendation to all foreigners not to buy a property in the Valencia Region in the, then present, circumstances. This was followed by a fierce attack from the property lobby, with the Federation of Promoters in Alicante threatening to take us to court for damage caused to their business.

The stock

There are many conflicting figures of how many properties there are at present in stock. The Government is only reporting new, completed, unsold dwellings, a figure which gives a twisted picture of the situation. We are giving the real number of dwellings looking for a buyer, the new dwellings produced, the ones in construction (but being offered for sale) and re-sale dwellings. This is also the conclusion reached in the 2009 report by leading real estate analysts R.R. Acuna & Acosiados.
The real estate analysts reported (2009 figure) there were 327,350 dwellings under construction. One may wonder why promoters continue producing dwellings that obviously will be part of the great surplus. The answer is simple: the building permits for those dwellings were granted in the last boom years. If construction is not started and finished within certain time limits, the permits will run out. There may also be building projects where several phases have been constructed and sold, and where maybe the last phases need to be added to complete the infrastructure. The construction is financed by the banks, which may not want the development company to go bust (which would mean them having to add the finished and unfinished dwellings to their already shaky balance sheets).
For these reasons the stock is not diminishing, on the contrary, it is still growing. Spanish banks trying to sell the dwellings they seized from promoters not being able to pay their debts, and not qualifying for a renewal of their loans, has had very limited results. The 'sales outfits' of the banks have mainly been peddling the properties to their employees and clients, offering them extraordinary credit terms.
The 1 to 2% increase in sales transactions, which the Ministry of Housing have so proudly announced over the past months, are mainly the special sales by the banks, together with the imminence of increase in sales taxes (effective from the 1st June – we shall see the statistical results in September). Moreover, a percentage increase based on a previously very low level of sales, does not have any significant effect on the “stock mountain”.

Prices

All experts agree property prices, down 20 to 25% from the peak, are continuing their downward slide. The Ministry of Housing reports that constructed costs per m2 were 4,7% cheaper in the first quarter of this year than last. However, the price still stand at 1,865 euro per m2 constructed.
The average price (Year 2000) per m2 overbuilt in Germany was 1,240 euro. Is there any reason why a dwelling in Spain, of lower quality than a German one, should be considerably more expensive? Some may answer that it's due to the better climate, but then we could expect dwellings in Andalusia to be more expensive than those in the Basque region? The contrary is the case!
No, the reason is the unfettered speculation in land values. The big money making machine in Spain over the past 10 years has been the transformation of farmland into building land. The procedure is really quite simple:
- Start buying smaller farms in an area, which later can be pooled. The individual farmers are being told by mayors (it helps if you pay him something) that their small individual finca cannot be redesignated as building land, their only way is to sell to the bigger guys.
- When a sizeable tract of land has been acquired, an urbanisation plan is prepared with maximum occupation of the land and number of stories. Beforehand having agreed with the mayor what is the maximum obtainable.
- Make sure the mayor (or superior layers of the administration) will provide road access, water, electricity and sewage, to minimize the costs of infrastructure (again certain payments in cash may be needed).
- With small dwellings (include entrance hall, staircases and corridors) and maximum number of floors you may squeeze in a great number of saleable units, and spread the cost of land purchase, construction, infrastructure and the ('political costs'). Add sales commissions and financial costs, multiply by 2, and hey presto you are a millionaire!
- According to the Housing Ministry, the price per m2 for building land in March was 204.7 euros. 10,000 m2 of such land will cost more than 2 million euros, before you know if your particular project will be approved and without the interior infrastructure, and before the detailed planning work.

25% unemployment this winter?

Approximately 10% of workers in the European Union are unemployed. Among the larger economies, Spain is the absolute leader, with unemployment around 20%. As always during the summer, tourism produces a number of additional jobs. In July, 1.4 million new labour contracts were registered. The Government is celebrating this as a great victory. Looking more carefully at the figures it can be seen that the number of new contracts are 0.41% lower than for the same month last year, and additionally, only 6.86% of them were for permanent jobs.
It can be expected, when the tourist season ends, the new contracts will be wiped out and unemployment will continue to increase. The 24.1% drop in car sales will lead to a reduction in the number of concessionaries and may also hit car producers (if exports do not compensate).
And, as the building projects still in progress terminate, there will be no other jobs for many of the remaining construction workers. The Japanese investment bank Nomura has made a study, where they predict another 350,000 employees laid off in the construction sector during this year and next. Experts have calculated unemployment may hit 25% this winter.

Property developers – a specimen in danger of extinction

The proud ship of Spanish property promotion is sinking fast. Its main motor – the foreign property buyers – has stopped and strong winds and the high seas of the world financial crisis are pushing it closer and closer to the dangerous reef called non-payment of the enormous debts to the banks. Some of the crew have already gone into the lifeboats, others are being swept overboard by the foaming sea. The captain of the ship can already see the ragged rocks of the reef ……
The property developers, in their greed, have sent millions of workers into unemployment and hundreds of thousands of Spanish families, which listened to the song of the Sirens about eternal low interest rates, great value appreciation and easy resale possibilities, into relative poverty.
During 2008 and 2009, 170,000 companies in the construction sector ceased trading; 23% of the total. Investment in housing is down to the 1994 level. The sector represented 7.5% of GDP in 2007, today it is 4% and is still on the way down.
More than half of the estate offices in Spain have closed their doors over the past two years, the remainders are surviving on rentals and administration. It is anticipated 75% of existing builders will go out of business over the next five years.
Do I expect Spanish property development to strand on the reef of their financial debts? The answer is frankly: I cannot see how they can avoid it.
Does this mean the end of property development in Spain? Of course not, the national market will be reduced, but continue to exist. People are moving from one place to another due to job changes, young people will want to marry and have a family. Some retired financially secure foreigners will join them. Nevertheless, for the foreseeable future, there will be no more special promotions for foreign buyers, with 2 swimming pools, 1 golf course and 1,000 dwellings.

Some will never learn

94 municipalities in the Valencia region have approved or under preparation, general plans that foresee the construction of another 870.734 dwellings. The remaining 448 municipalities in the regions are waiting the end of the crisis.

The economy: The lull before the storm?

Partly due to the “stress test” of the banks in the European Union,
Spain weathered the credit crisis before the summer.

The Government managed to place several bond issues on the market at better conditions than the ones obtained previously in the year.

The economy increased 0.2% in the second quarter.

The latter part of June and especially July showed an increase in employment, thus slightly lowering the number of unemployed.

The Government is again declaring that the lowest point in the crisis has passed and the country is on the road to recovery.

In the following, we shall study the realities behind the numbers and declarations:

The “stress test”

The economist Nouriel Roubini (the “guru” who foresaw the crisis) and many others, consider the conditions of the test were not sufficiently realistic. It may be that the test was partly to create an atmosphere of tranquillity and confidence in the European banks.

However, it must be noted the solvency of the big banks in Spain, especially Santander and BBVA, and on the other side, there are four, of the new groups of Saving Banks, which have been suspended: Unnim, Diada, Espiga, Banca Civica and of course CajaSur. Unnim stands for the fusion between Caixa Catalunya, Tarragona and Manresa, which needs an injection of 1,032 million euros. Diada is the result of the fusion between Caixa Sabadell, Terrassa and Manlleu, they need another 270 million euros. Espiga stands for the collaboration between Caja Duero and Caja Espana they need an injection of 127 million. Banca Civica consist of Caja Navarra, General de Canarias and Burgos, they need 406 million. CajaSur will be integrated in BBK.

That means a total of 2,000 million euros is needed by the new groups of Saving Banks emerging from the crisis.

Leading newspaper “El Mundo” asked its readers if they have more confidence in the Spanish banks after the stress test. 33% answered yes, 67% said no.

Financing the debts

The Government used the improved confidence in the Spanish banking system to offer several Debts Bond Issues, at a lower interest rate than ones earlier in the year, however, the interest rate was considerably higher than what Germany pays for similar bond issues.

There is a significant fall in investment by foreign entities in Spanish bonds. National institutions picked up the lions share, meaning Spanish Banks and Saving Banks, and entities such as the Social Security System, which placed a significant part of its diminishing surplus in the supposedly secure government bonds.

In the remaining months of the year, the Government needs to attract significant new sums by means of new bond issues.

On the other side, several of the regional governments, which are also able to issue bonds on the international money market, are having considerable difficulty finding investors. The Basque Region had to postpone a bond issue planned for April, as too did Catalonia and Madrid.

Regional debt

Including an increase of 8,337 million in the first quarter of the year, the Regional Governments have debts of 94,621 million euros. Central Government calculates the Regions should save 20,000 and pay back the 27,500 million they owe Central Government.

The Regions promised to make their share of the saving towards the public deficit, however, so far, little has been done. The largest holes in the Regional Economy are the Regional TV channels. The 13 Regional TVs have a joint debt of 1,623 million euros, a staff of 10,200 people and accumulated losses of 1,208 million euros in the last accounting year. Instead of cutting staff, the Administrations are cancelling the permanent contracts of many employees and then taking them on again through the back door on a non-permanent basis. The number of public employees in the Regions increased by 73,000 over the past year.

Even more serious is the meltdown in the Social Security System funds, which were reduced by 15.9% over the past 12 months, down to 9,900 million euros. The think-tank of the Saving Banks, Funcas, calculates the system will go into the red next year.

Subsidies increase economy

An increase in the economy of 0.2% in the second quarter is, in itself, a very modest result. Furthermore, as it was the result of the Governments subsidies to car buyers in a program, which has now ended, it is less significant. In addition, the higher taxes from the beginning of July, created an artificial rally in the purchase of cars and dwellings.

In July car sales dropped to 24.1%. We can expect this trend to continue in the coming months.

Dark horizon on the labour market

When the tourist season ends in a few weeks, more than 90% of the non-permanent labour contracts made for the summer, will cease. That means hundreds of thousands will re-register as unemployed. The car concessionaries expect a loss of 200,000 jobs due to the end of subsidies for car buyers.

Moreover, the Government has suspended 220 countrywide contracts for infra-structure work, and the general secretary of the biggest labour union, CCOO, has warned that it will affect the creation of 100,000 jobs for new employees.

We may be heading for 25% unemployment before the end of this year. Some experts are already talking about 30%. For young people under 25 years unemployment has already reached 42.6%, and many young workers have stopped going to the employment offices because they have lost any hope of finding employment.

The unemployed pay little in taxes, instead they soak up the diminishing surplus of the social security fund.

Crisis in the town halls

The situation in most town halls is catastrophic. In the Madrid Region most of the smaller municipalities were not able to pay summer salaries, and some mayors are planning to retire due to the situation. A large majority of the town halls in Andalusia are insolvent, or very close to becoming so. Of the 8,000 town halls in Spain, 400 have stopped paying electricity, water and phone bills.

Electricity company Iberdrola has cut electricity to certain regional railway installations in the Valencia region, including the company that manage the Metro in Valencia, the train station in Benidorm and on Terra Mitica. The cuts are punctual and meant as a warning to the regional governments.

Due to the collapse of the building sector, the town halls are collecting 15,000 million euros less per year. They will probably have an income from building activity of only 1,830 millions this year, 90% less than 4 years ago. The Spanish municipalities have debts totalling 36,000 million euros.

The Andalusia Court of Justice has recently decided that the personal assets of a mayor can be sequestered, if the debt of the town hall to a private provider, is not paid within 30 days. The mayor of Castilleja de Guzman, in the Province of Seville, is affected by this ruling, which may also affect several other municipalities.

Bad debts snowballing

Bad debt in the Spanish financial system exceeded 100,000 million euros in May. The percentage of bad debts in relation to the totality stands at 5.494%, one point more than in May 2009.

The banks have almost closed the financing tap for small and medium companies. If credit is granted, it is at higher interest rates and with demands of personal guaranties from the companies' owners.

The debts of banks to the ECB

In June, Spanish financial entities had debts totalling 126,300 million euros to the European Central Bank (ECB), the biggest debt in history. This is an increase of 78.6% from June 2009, and an increase of 47.5% over that in May this year.

Foreign investments down

Spain dropped from the 6th to 20th amongst countries receiving most foreign investment. In 2008, Spain received investments from abroad of 73 billion euros. One year later, it was down to 15 billion.

The World Bank looked at one hundred and eighty three countries to decide where the conditions for starting a business were best; Spain came 62nd. One year ago it was 51st.


New serious warnings:

The International Monetary Fund has issued a stern warning to Spain, that the measures taken so far will not suffice and that the country need to take more drastic measures and reinforce the ones already initiated.

The IMF disagrees with the, always over-optimistic estimates of the Spanish Government. Their experts believe Spain's economy will only grow 0.6% in 2011, not the 1.3% calculated by the Government, and that recovery will only have reached 2% - the growth necessary to create jobs – by 2015.

The Royal Bank of Scotland believes Spain needs to make use of the European “rescue fund” and that the ECB must purchase the public and private debts of Spain and inject 50,000 million into the Spanish banking system. The Royal Bank considers there is a 60% probability that Spain will have to apply to the “rescue fund”.

Due to the lack of optimism for the Spanish economy, the Bank of America – Merril has said the rating agency Moody will lower its qualification for Spanish debts in October, from AAA to AA.

We shall have to keep the seat belt fastened as we move into the second half of 2010!

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