international analysis and commentary

Spain’s housing nightmare after the dream

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To understand the economic crisis in Spain in its essence you need only track the development of the housing market there. In the years of plenty, 1985 to 2008, everything was working as it should: people were buying, banks were lending, there was a plentiful supply of new and refurbished properties on the market. As a result, a bubble emerged with prices rocketing up to 200% in the years 1996 to 2007. It was the Spanish Miracle, but sadly like every bubble it had to burst.

The Spanish housing market is an example of a perfect storm – fuelled by a national psyche that owning your own home is the right thing to do and by significant demand from overseas investors anxious to – literally – claim their place in the sun. Demand was high and the market did what markets do, it attempted to meet the demand. New construction flourished in all major cities, new developments popped up on virtually every coast and before long supply was significantly outstripping demand.

Then, like all other European countries, the Spanish economy felt the chilly winds of recession when the global economic crisis struck in 2008. At that point  the people of Spain discovered that their entire economy was built on sand and when the wave struck, it left disaster in its wake.

There appears to have been a collusion between politicians, building companies, and banks. Politicians are said to have been on the take from property developers and turned a blind eye to new building projects that clearly flouted planning laws or other restrictions. Property developers vastly overestimated demand and now there are at least 800,000 unsold new and unfinished properties, according to official sources, littering the landscapes of many Spanish towns. As for the banks, perhaps their role was the most significant, fanning the flames of the market by lending to people who really couldn’t afford to pay back the loans and providing mortgages lasting for 40 and 50 years, ultimately sentencing the borrowers to a life of penury in case of a price collapse.

In this context, here are two recurring scenarios that many ordinary Spaniards have experienced.

A young family man, in a good job earning good money, doing well by his family and buying a property in his local town. He gets the maximum mortgage available and is proud to own his own home. Now he questions his decision. His home is worth a third of what he paid for it in 2008, days before the crash. For what he paid then he could buy a large detached home now. He will never be able to move from this house. He is a prisoner there.

A middle-aged woman who had rented her whole life decides she too will jump on the property bandwagon. She can’t afford to buy something brand new so she buys a flat in a refurbished building that looks as good as new. Five years later she discovers that the developer who upgraded the building cut corners wherever he could and now the entire structure of the building is unsafe. 

More categories have been hit hard. Many young people chose to quit school and take work on the construction sites of Spain. Jobs were in plentiful supply, the money was flowing and they could make a good living – more than people who slogged it out at university for years, so what was the point of that? When the bubble burst, this group was one of the first to feel the effect and now they make up a significant part of Spain’s estimated six million unemployed. The replacing of this low-qualified massive labor force will be a major task for the current and future governments.

A former Basque Country Socialist Councilor, Amaia Egana, threw herself out of her fourth floor apartment seconds before she was scheduled to be evicted from her home by her bank. Floral tributes called the bank extortionists and clearly held them responsible for the tragedy.

Indeed, Spanish banks do not fare well in this sorry tale. An estimate from the Bank of Spain suggests that there is an eviction every 15 minutes in the country. But that’s not the worst of it. If you have a mortgage in Spain and find yourself unemployed and unable to pay it, you will quickly find that your troubles do not end when you take the sensible approach of handing your keys back to the bank. The bank will indeed take your keys but it will also maintain your debt, even though it now has your asset. The nightmare doesn’t end when you chose to leave your dreams of home ownership behind. It’s all perfectly legal, with the banks protected by arcane laws that nobody really knew about before.

Families are now often forced to live with parents and grandparents, and the media sometimes tell stories of people living in their cars outside their former homes. Walk around cities like Barcelona one can see building projects that began before the bubble burst and sit now like monuments to what might have been if only the deception could have lasted a little longer. In Madrid, builders gave up the construction of entire new neighborhoods, like the northwestern Pitis, halfway through.

The authorities have responded by forcing the banks to be a little more sympathetic when dealing with people in genuine need. This was not an instinctive response from the ruling Popular Party, but one it was shamed into taking through the actions of other parties and social movements like PAH – Plataforma de Afectados por la Hipoteca (platform for people affected by mortgages). Its activities include collecting signatures, organizing protests, and shaming local politicians into responding with more empathy to the plight of people affected by the crisis.

In an attempt to ameliorate the situation, the Spanish government has opened up residency advantages to non-EU nationals who buy property in Spain valued at over 500,000 euros. Banks are now the subject og growing interest from China and Russia. Indeed, whole batches of property now held by the banks in Spain – the result of evictions or people handing them back – are being packaged and sold off to the highest bidder, most recently to hedge funds in Mexico and the US. And even social housing is not immune, with some cash-strapped local authorities selling off housing stock to property developers who have only committed to maintain low-cost rents for 10 years.

Property prices continue to fall, banks are wary of lending to anyone without a pile of cash and so the economic crisis will result in far fewer people owning their own homes, and more will have to rent. As for the new homes that lie abandoned and unlikely to be occupied any time soon, there are calls for them to be demolished, an admission by everyone that the situation is unlikely to return to the glory days before 2008. The perfect storm continues.

While the aspirations of ordinary Spaniards will have to adjust to the new reality, it is clear that in the medium to long term individuals with cash to spare and giant hedge funds and other investment houses will profit from the misery.