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

As a RICS Chartered Surveyor, resident and valuing residential property in Spain for the past 10 years and involved for many years before, I’ve taken a professional interest in all that’s been happening with regard to property price trends in Spain. Since so many of Spain’s unsold (and repossessed) properties are held by the country’s banks, they play an important role in the price determination of Spanish real estate.

The big question has always been: “Who is going to occupy these properties?” It’s not just price that’s the problem. For too long, there was just too much superfluous construction funded by speculators and land buyers, with little thought as to whether anyone would actually want to live there. That’s the real overhang of the market. Now some banks are continuing the immoral practices of high loans by offering to lend sometimes more than 100 per cent of the valuation of properties they have taken ownership of – presumably because it helps them to offload properties at inflated prices.

It’s not repossession in the true sense of the word, as the bank never owned or wanted these homes in the first place. To a naive buyer, however, this is not a problem, as naturally they will be able to keep up the payments and not want to sell until the market comes back up again. But should they have to sell, they will have lost at least 10 to 20 per cent of the value in buying and selling costs. Then their neighbours who didn’t have a 100 per cent mortgage to offer, will have had to drop their price substantially to sell in competition with the banks, as will the troubled owner, who could take a ‘hit’ of 30 per cent or more. So eventually it could become another bad loan, which the bank would have to take back at a low value. They would then have two people owing them money because of defaulting loans on the same property. And so it could go on…

During the last recession in the 1990s, banks that held onto properties hadn’t loaned much over 50 per cent of the valuation, therefore didn’t have to revise values nearly so often and were able to wait out the much shorter recession to sell at a profit. Maybe that’s what they hoped would happen now, but the boom and bust cycles have been so much more exaggerated this time round.

In addition, 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 that are not carried out by valuers indebted to them and are regulated by the Bank of Spain.

Luxury villa SpainThe statistics on prices are all skewed due to the practice of not registering the true price of a property. With the new 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 is reduced. 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. In such circumstances it’s definitely more of an art than a science.

And the future for values in Spain? In the truly Spanish areas of the economy it’s depression all the way and difficult to see anything other than a substantial time needed for a climb back to a comfortable standard of living. In the more international coastal areas where I carry out most of my work, there is the benefit of a climate, lifestyle and infrastructure that continues to attract people and investment in. So anybody in northern, wetter areas such as the Nordic countries, Russia and yes even the UK, who comes into a bonus or lump sum of money will consider buying down here. But now they can afford to look only at the best real estate on the market, so prices for good properties in popular areas have not dropped by nearly as much as the standard two-bed apartment.

Buyers know that they are a relatively rare commodity and will always seek bargains, trying to beat down the price through 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.

And then there are 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 conscientious property valuer, who can calculate what a property is worth today but certainly cannot offer a valuation guaranteed for six months, as do the banks’ valuers. But then, the banks will be reluctant to sue their own, especially when in the process it would reveal that prices are even lower than those shown in their accounts.

Campbell D. Ferguson, FRICS, is a chartered surveyor in Spain. His company, Survey Spain Network arranges valuations and surveys anywhere in mainland Spain, the Balearic and Canary Islands, and Gibraltar.