Spain: seven years after the housing bubble burst
Prof. Dr. Sergio Nasarre-Aznar of Rovira i Virgili University tells us about life after the Spanish property bubble.
Tens of thousands of evictions since 2007, 3.5 million empty houses in 2011, an unemployment rate of 26 percent, a youth unemployment rate of 60 percent, a tax evasion ratio of 25 percent and two complete reforms of the mortgage market and the law of leases. After the perfect storm, Spain begins 2014 with artificial growth of a private rented sector otherwise with the smallest share in Western Europe – growth due to the lack of liquidity of Spanish lending institutions and the difficulties for businesses and people to access credit – as well as experiencing a consistent fall in the value of properties and a mortgage delinquency ratio of eight percent, which is increasing every year.
Even if the devastating worldwide impact of the United States mortgage crisis involving massive mortgage defaults was fundamentally due to international ‘mortgage securitisation’, the generalisation of homeownership through the over-indebtedness of families clearly unable to pay back their loans has been one of the main reasons why the 2007 crisis has hit harder in countries such as Ireland, Spain, Greece or Italy. Reckless lending and irresponsible borrowing combined to rock both the mortgage markets and the idea of the home as a human right.
Spain reacted to this scenario very late. The first relevant measures did not arrive until 2011, forced by two factors. Firstly, imprecise data offered by the Government Body of the Judiciary announcing 400,000 mortgage enforcements and evictions since 2007. It was imprecise as they did not discriminate between first residences and other properties, even commercial premises. Secondly, the first judicial decisions on bad banking practices that revealed an abuse of consumers in the mortgage lending business. At the same time, the so-called ‘Robin-Hood’ judicial decisions began – decisions not based on law but on each judges "own personal idea of justice” in order to favour the poor (consumers at risk) against the rich (the banks). The environment that greeted those changes was massive demonstrations in the streets against the banks, the politicians and even against the ones that I personally consider the most responsible for the crisis, the ratings agencies.
The legal changes were twofold – one set of changes that dealt with the most urgent matters (evictions, bad banking practices) and those that were structural to prevent further housing bubbles (the regulation of intermediate tenures in Catalonia).
In relation to the former, in 2011 the minimum amount of household income per month unable to be seized by creditors was increased to an average of €1,200 (called the minimum unforeclosability threshold). In addition to this, banks were forced to take a mortgaged property if public auction was unsuccessful and, as a consequence, were also forced to reduce the amount due by the borrower by 60 percent - increasing in 2013 to 70 percent. All Spanish mortgages are recourse mortgages, except if otherwise agreed by the parties. In 2012, a code of good practice was accepted by the majority of banks – the measures of which were not deemed very burdensome – compelling them to accept forced acquittances, delays or even the datio in solutum in cases of mortgages defaulted by people in need. Moreover, a pool of several thousand dwellings was created for social rented housing, instead of using the properties transferred to the newly created “bad bank” (Sareb) for this purpose. Unsurprisingly, the bad bank is obliged by law to speculate with unsold properties belonging to partly nationalised banks (e.g. Bankia, CatalunyaCaixa) and to sell them for profit in 15 years in packages, mainly to international investment funds. Also in 2012 a moratorium of mortgage enforcements against people in need was introduced, which finishes later this year.
In relation to the latter, most relevant reforms came in 2013 with important changes to legislation and the mortgage market. These included more protection for consumers in cases of mortgages on their first residence, and in the law of leases a decrease in the protection of tenants, seeking to encourage landlords to let their empty properties. Also in 2013, for the first time since the 1940s the Spanish National Housing Plan (2013-2016) focuses on promoting the renting of dwellings and their rehabilitation instead of homeownership. In 2014, Catalonia will probably pass new legislation introducing shared and temporary ownership to promote affordable and stable access to housing, thus avoiding over-indebtedness.
It is too soon to say to what extent these measures will palliate or solve the negative consequences of the crisis. However, this twofold approach of addressing urgent matters and more structural solutions seems to be correct – the minimum unforeclosability threshold, the code of good practice (reinforced in 2013) and the mortgage enforcement moratorium have contributed in slowing down evictions. Though it should be noted in 2013 those evicted for not paying rent were more than those evicted for not paying their mortgage. Meanwhile the measures with longer scope may contribute to avoiding new bad banking practices or even the over-indebtedness of families.
This article was originally published in Issue 6 of Housing Ireland - CIH's journal for Irish Housing Professionals.