Property ValuesValuation Spain

Values and the Banks – where do we go from here?

By December 19, 2011 No Comments

(Submitted in response to an article in the FT.com 15th December 2011 – ‘Terminado del forebearance’.)

As an RICS Chartered Surveyor resident and valuing residential property in Spain for the last 10 years and involved for many years before, I’ve taken a professional interest in all that’s been happening.

The big question has always been, “Who is going to occupy these properties?”. It’s not just price that’s the problem. There was just too much funded by speculators and land buyers, with little thought as to why anyone would actually want to live there. That’s the real overhang of the market. Banks are continuing the immoral practices of high loans by offering sometimes more than 100% loans to their valuation of properties of which they have taken ownership. It’s not repossession as the bank never owned or wanted them in the first place. To a naive buyer, it’s no problem as of course they will be able to keep up the payments and not want to sell until the market comes back up again. But if they have to, they will have lost at least 10% to 20% of the value in buying and selling costs. Then their neighbours who didn’t have a 100% mortgage to offer will have had to drop their price substantially to sell in competition with the banks and so will the troubled owner, so they could take a ‘hit’ of 30% or more on a 100% mortgage. So eventually it could become another bad loan and the bank have to take it back at a low value. The bank will then have two people owing them money because of defaulting loans on the same property. And so it could go on.

In the last recession in the 90’s, banks who held onto properties, hadn’t loaned much over 50% of the valuation, didn’t have to revise values nearly so often and were able to wait out the much shorter recession and sell at a profit. Maybe that’s what they hope will happen this time round.

But all the factors that gave rise to the huge increase in prices from the depth of the 90s to the peak of 2007, will never coincide again. So prices aren’t going to rise any time soon. Eventually, surely, the banks will have to provide realistic current market valuations not carried out by valuers indebted to them and regulated by the Bank of Spain.

As ABS says, the statistics on prices are all squewed due to the prevalence of not registering the true price of a property. With the money laundering regulations the professionals have largely stepped away from assisting with this practice and so registered prices have appeared to rise as the cash element in payments reduce. That has countered the real fall in prices and will continue to do so until some foolproof method is found of ensuring the total price paid is the one registered. As a valuer I have to depend upon my skill and 40 years experience in judging values based upon asking prices and often inaccurate property descriptions. Definitely more of an art than a science.

And the future for values in Spain? In the true Spanish economy areas, it’s depression all the way and difficult to see anything other than a substantial time for a climb back to a comfortable standard of living. In the international coastal areas where I carry out most of my work, there is the benefit of these areas having the best climate in Western Europe and a good infrastructure thanks to the money the EU has provided. So, anybody in the Northern, wetter areas, such as the Nordic countries, Russia and yes even the UK who comes into a bonus or lump of money, will consider buying down here. But only the best, so prices for good properties in popular area have not dropped by nearly as much as the standard 2 bed apartment. The buyers know that they are a relatively rare commodity and thus will always seek bargains, trying to beat down the price by very low offers. However, as they are buying to occupy and not only speculate, they will eventually pay a reasonable price for something that they really want.

However, back to the banks. The bulk of their properties are not in that market and I foresee that they will eventually either be forced into a Nama style situation, which the country cannot afford, or collapse and be liquidated at bargain prices. Either way, the property market will reflect society, where there will be an increasing differential between the haves and the have nots; the good properties maintaining a value and the poorer prices collapsing to nothing more than the cost of a bed for the night.

Troubling times ahead and a difficult one for a concientious property valuer who can calculate what a property is currently worth today, but certainly not offer a valuation guaranteed for 6 months as do the bank’s valuers. But then the banks will be reluctant to sue their own especially when it would be to show that prices were even lower than those shown in their accounts.