S&P: "Spanish Home Prices To Drop Another 25%"

Tyler Durden's picture

For all the news out of Spain: tumbling sovereign bonds, bailed out banking sector, there really is just one driver of everything: the same one many have been warning about for years: the artificially inflated valuation of the Spanish housing sector. Because the only reason why banks are suddenly finding that their assets are worth much less than previously expected, is because it is now impossible for local banks to keep the real-estate "assets" on their books at marks-to-model (read par) as the bulk of them have long since become impaired, delinquent or outright defaulted.

The common theme of course is that they no longer generate cash inflows. What however is still there are bank liabilities, which most certainly generate cash outflows. And in the absence of retained earnings (but plenty of retained losses), there is just no more cash to mask the capital deficiency. That's the whole issue with not only Spain, but Europe in a nutshell, the same we have been banking the table on for the past year: the accelerating disappearance of money good and cash-flow generating assets. Furthermore, once the spigot has been turned on, there is no stopping it, and the marks-to-market start pouring in fast and furious.

Which is the worst news for holders of Spanish bonds, now that the entire banking sector is effectively pari passu with the sovereign debt courtesy of priming ESM debt: recall that every incremental dollar, or in this case, euro, of bank capital deficiency will be one more priming bailout euro behind. Effectively there is now an inverse relationship between the Spanish housing sector and the country's sovereign bonds. And for those who are still naively are clutching to Spanish bonds, even as they tumble to all time lows (that's the local law, as opposed to the legal arbitrage trade we have been promoting and which today is making even more money), we have some bad news: that perpetual of optimists, S&P, just said that the Spanish housing sector has, wait for it, another 25% to drop!

This means a comparable drop in store for Spanish bonds and all the related securities in Europe, which courtesy of the bailout are all now daisy-chained.

From S&P:

Spain's Housing Market May Need Four More Years To Rebalance


The unwinding has begun: House prices have dropped 22% in nominal terms between first-quarter 2008 and first-quarter 2012, according to the Organization for Economic Cooperation and Development. That's more than in any other eurozone country except for Ireland. However, the magnitude of the decline has to be juxtaposed against the 150% rise in prices in Spain between 2000 and the peak in 2008. We note that prices climbed 116% in Ireland and 60% in the eurozone on average over the same period.



  • For Spain's housing market to recover, household debt, which is still high, needs to come down further, implying years of weak
    credit demand.
  • Because of the heavy weight of unsold housing stock, we believe that the correction in housing prices is likely to be deeper and
    more prolonged than in the previous cycle, taking up to four more years for the market to absorb the glut.
  • A look at fundamentals--price to income and price to rent ratios--leads us to expect a further 25% drop in housing prices.
  • Investment and employment in the construction sector is now down to 12.7% and 6.8% of GDP, close to half of 2006 and 2007 levels, respectively.
  • The bursting of the real estate bubble is visible in Spain's dire economic prospects: Standard & Poor's expects GDP to contract in real terms by 1.5% this year and by 0.5% in 2013.

There is a lot in the report, but here are the key points:

Market Fundamentals Also Point To A Further Decline In Prices


Price to income and price to rent ratios in Ireland and the U.S. now stand below or nearly below their long-term average--but that is not the case for Spain. The country's price to income ratio has dropped from its peak in fourth-quarter 2006 but is still higher than its long-term average, and the same observation can be made about the price-to-rent ratio (chart 3). Looking at just these measures, Spanish house prices still need to adjust by nearly 25% for them to return to their long-term averages.



The Sharp Rise In Unemployment Is Weighing On The Household Sector


We expect Spain's economy to contract by 1.5% in 2012 and 0.5% in 2013 because of deteriorating private consumption, fiscal retrenchment, and weak credit conditions--coupled with flimsy external demand for Spanish products. High unemployment has been a drag on private consumption since the reversal of the housing and construction boom. The construction sector's share of GDP climbed from 15% at the end of 1999 to 22% in 2006, compared with 6% on average in the eurozone over the same period. With the real estate bust, Spain's construction sector has shrunk, representing only 12.7% of GDP in 2012.


The contraction of the construction sector triggered a loss of 1.5 million jobs between 2008 and March 2012. Employment in the sector, which was one of the highest in the EU with 14% of total employment in 2007, declined to 6.8% in March 2012. In comparison, this sector in France accounted only for 6.5% of employment in 2007.


The surge in unemployment is reflected in higher doubtful loans, as households find it more difficult to service their mortgages (see chart 4). Yet low interest rates have provided some relief to borrowers. Spanish households are very sensitive to changes in interest rates, since variable-rate loans comprise 90% of mortgages in Spain. That compares with 40% in the eurozone. In February 2012, as the unemployment rate reached 24%, doubtful loans reached 2.8% of total housing loans, a ratio that appears still reasonably low. But as the economy continues to weaken, we will continue to watch that indicator carefully as a potential harbinger of additional financial difficulties in the household sector.


And there you have it. Remember: Greek bonds at 100% in September 2011 were a whopping buy. Until of course there were an even more whopping buy at 1000% a few months later.

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Ahmeexnal's picture

Espan~oles Gilipollas!

SilverTree's picture

The Monsters at the Turning of the Age





When you are aware, you can prepare.


sunaJ's picture

Look what those rascals are building now.  They're so funny with their toys, playing around in the sand and in our backyards.  So cute!

CClarity's picture

Spain issues dramatic messages of IMPENDING eurozone doom via  - -  "A panicky spanish Government issued dramatic messages of impending doom" In essence, Minister says future of Eurozone will be determined in next few days, perhaps coming hours.

SilverTree's picture

"Luke at that speed do you think you can pull-out in time?!?"

Bicycle Repairman's picture

"Spain's Housing Market May Need Four More Years To Rebalance"

Comedy gold.

mr_T's picture

Prices for a flat in Madrid are still ridiculous. I have been waiting since 2005 to buy a place... I'll wait till the big reset and keep stacking..

Silver Bug's picture

Another bubble exploding, hold tight your gold and silver. Don't listen to the banksters.


Buy Silver, Take your Freedom back!

Dr. Engali's picture

It's all good....we live in the land of the free and the home of the brave. A people as proud and as brave as those here in the U.S will never stand for government intrusion into their lives like that. Now pass the Doritos and give me the remote...Oprah is having Dr. Phil on today.

SilverTree's picture

Yerp, a major rude awakening is on the way for the bulk.

Mark123's picture

I like the pretty retards chatting about it.  Wouldn't it be cool if the drone came along and shot hald of her face off in this clip.


"It's interesting they are testing these things right in our backya.....aaaaaaaaaaaaaaaaaaaaaaaaaaaaaaarrrrrrrrrrrrrrrrrrgggggggggggg. Gurgle....gasp....thump"

somecallmetimmah's picture

Yeah, how do you say 'mi casa es su casa' in Mandarin again?

Unbezahlbar's picture



Inland Empire posts highest foreclosure rate of big metro areas By Alejandro Lazo




U.S. Home Foreclosure Activity Upticks 9% in May Over Last Month



RmcAZ's picture

At least the U.S. housing market has bottomed.

Zero Govt's picture

Yes indeed ...well at least it will bottom soon as the US Banks release the 1 million $1m+ homes back onto the market they're hiding under the rug

well when i say $1m+ homes, they may not actually fetch that you understand

Bunga Bunga's picture

Another sign that there is a bottom is that it has been bottoming for years now and will be bottoming for many years to come.

BandGap's picture

Good Lord, this isn't funny at all.

The Spain economy is what the current administration modeled in moving towards "green" solutions for energy employment. So much fucking waste, and wasted jobs.

Manthong's picture

I was just about to mention how successful the tens of billions Spain has invested in solar and renewable energy is at producing jobs and cheap electricity.

Ropingdown's picture

Great comment.  I have to laugh. Spain was very much part of the model for Obama. Sweden, France, Spain.  Benefits.  Mortgages for everybody.  Michelle vacationed nearby.  It was the dream-world of the Chicago houses-for-the-poor crowd, which is Jarrett, Obama, Michelle, Rezko, etc.  Lots of upscale for the elite, but also lots of nice condos and town-houses for the minimum-wage folks, free medicine for everyone.  Well, copy them now, hotshots!  You already did?  Too late to rethink.  Sweden, my wife's other home, is still good, but there's not a chance in hell the US can copy them.  Simplicity, high taxes, uncrowded, just a different world.  I suppose it's like living in coastal Maine or New Hampshire IF you also have a government pension/HI. laugh. What a world.

Zero Govt's picture

the Spanish (Govt wrecked) green energy sector is a social joke 

the funniest story is the wind turbines being hooked up to diesel generators so when they don't spin (all too often) the public-private partnership can still generate income credits from the national grid

Europe is awash with these useless windmills (and Don Quixote Govt ministers chasing bankrupt green demons, sorry dreams)

Ropingdown's picture

Yep about the diesel.  But those government ministers were chasing pensions and plum appointments to Brussels and other EU locations after they earned it by spending so much, which is hard work. I have found the "let's one up California" approach increasingly odd. The high-speed trains are wonderful as are the new local [to me] highways. Mountains of debt for those, I'm sure.  The taxes in Spain for residents are very high.  The pols 'retire' to Brussels or Luxembourg jobs and don't pay tax.  Games.  The whole world has become games.  Was probably true 100 years ago, I tell myself.

vh070's picture

Better acknowledge that you screwed the pooch by being blind to the abuses and do something positive: Take and hold.

1) Take over the mortgages

2) Write them down by some nominal percentage

3) Turn remainder into equity paper

4) ...taking compensating equity in the homes and banks

5) Allow banks and homeowners the option to buy back equity

6) Charge nominal rent where appropriate

7) Adjust upon change of ownership

8) Review every two years

9) Add a progressive surcharge tax on banker salaries

Yah, you'll kill the real estate market for a decade but it's dead already.  It may be complicated but the alternative is… what?
asteroids's picture

There will be no G20 bailout. HTF's can be beaten/destroyed by LYING to them. You have 5-10mins to profit on rumor. Yipee!

Snakeeyes's picture

I wrote about this earlier today. BAD housing numbers, BAD unemployment numbers, HUGE bad loans, ZOMBIE borrowers.


Sorry Spain, you are a cooked goose.

Rip van Wrinkle's picture

Just wait 'til the UK has the same problems.

devo's picture

US housing has another 25% drop, too. At least in real terms.

Bicycle Repairman's picture

Since the government insists on interfering with the housing marketplace the 25% drop will take place over a generation.  A death by a 1,000 cuts for RE investors.

DrDinkus's picture

anybody else need a drink?

morisu's picture

Well.. at least they are killing Ireland right now at Euro2012 football. Have to give them something, they can play.

Ineverslice's picture

Asset deflation.....plain and simple.

geewhiz190's picture

just when i thought it was safe to get back into the pool....killjoy!

DrDinkus's picture

Bob Pisani...what a windbag

wandstrasse's picture

This is bullish... at least the OSBORNE bulls should keep standing.

l1b3rty's picture



1835jackson's picture

You know people joke about all this but the human toll will be horrible when the BIG stinking, steming pile of shit hits the fan. FUCKING central bankers you should all be thrown in jail with your worthless money for eating....you cunts.

Zero Govt's picture

so agree

but staggeringly the dizzy chicken caught in a hurricane better known as Mervyn King, Governor of the Bank of England, the worst, most inept and clueless Gov in 200 years is getting both a pay rise and lining his pension like never before

King should be swinging for his total incompetence as regulator, Gov, non-problem solver but no, snout in the trough like it was 2005 and nothing had happened!!

q99x2's picture

Don't tell the Bernank otherwise he'll be over there trying to prop up the Spanish housing market with my mother's social security perscription medication money.

deepsouthdoug's picture

Only 25% - Let's go for another 80% down. 

Duke of Con Dao's picture

don't worry David Koch is tanned, fueled up and on his way


by the time his yacht reaches Spain it'll be a buyers market


GMadScientist's picture

And me without my rifle.

<snaps fingers>

CommunityStandard's picture

Spain is the obvious one.  How long until the S&P admits that the US has another 25% drop (at least) to go?

Muppet Pimp's picture

Globalization is a fail for the little guy, period.  That is my story and I am sticking to it.  It is a boon for the financiers but they are the only ones.  This is such a ridiculous joke anymore.  All the citizens of the world being tied (through their retirement funds and the financial markets) to what the outcome of an election from arguably the laziest people in all of europe decide to vote for is ridiculous.  Everyone knows what the Greeks will decide, they will decide to do whatever is palatable at the moment to get the free moneez.  They will choose that over and over again.  These people do not even pay taxes and still want the free stuff. At what point do the globalists have us all on the edge of our seat as they colonize the last tribe on Papua New Guinea and there is a referendum on whether or not they will give up cannibalism.  This is such a joke.

killallthefiat's picture

The NAR just tweeted:

The US is not Spain.

Zero Govt's picture

True ....the US is worse than Spain for debt

...a fragile thread called 'confidence' is what keeps the US from being hung out to dry like Spain

GMadScientist's picture

please scale bailouts of agua-casas accordingly by 1.33

the 300000000th percent's picture

Bullish, priced in, possible just straight up ignored..... The market only cares about good news now a days ZH they wont pay attention to this sort of news

Snakeeyes's picture

Since it just dropped 5% for Q1, zombie borrowers, growing unemployment, and bank rates skyrocketing, YUP!!!!!!

The NEW Zombie Apocolypse!


robertocarlos's picture

Sell your house in Canada and move to Spain.



AlaricBalth's picture

Sell your re-inflated condo in South Beach, Miami. Move to Spain.
Profit without having to learn a new language.