To Save Spain's Housing Market, It Must First Be Destroyed

About a decade ago, Spain set off to "grow" its economy by launching an unprecedented homebuilding campaign. Several years later the campaign backfired, when the global housing bubble popped, and hundreds of thousands of houses ended up underwater, vacant or simply incomplete while millions of people lost their jobs, resulting in possibly the worst depression in Spanish history. Fast forward to today when Spain is about to set off to "grow" its economy by launching an unprecedented counter-homebuilding campaign, one in which the housing excesses of the last "growth" campaign will be literally demolished. And thanks to the magic of modern Keynesian math, both construction and destruction will result in growth for Spain.

Bloomberg explains:

Demolition man Daniel Anka had a staff of 450 in Spain preparing for new developments before the property crash. With about a 10th of that workforce left, he’s now waiting for a call from the country’s bad bank so his trimmed-down crew can start knocking down half-built homes that aren’t worth completing.


Anka may not have long to wait as Sareb, the unit holding soured real estate assets from Spain’s nationalized banks, orders work to stop on about 160 of the 650 partially-completed building projects on its books and decides which ones are worth completing. A small number of them may be demolished, said two people with knowledge of the matter, who asked not to be identified by name because it isn’t public.


“We expect the bad bank will start to seek bids for some demolition projects starting this summer,” said Anka, chairman of Madrid-based Anka Demoliciones and vice-chairman of the Spanish Association of Demolition Businesses.

Here by "small" they mean "large", if not all. Because once the demolitions begin the implicit acceptance that houses have a value of €0 on the books becomes rubberstamped and banks will have no choice but to remark their books accordingly. At which point the course of action will be the same as in the US - create a supply shortage (in the US this is done by the foreclosure stuffing process we have been describing for nearly a year) in hopes of pushing equilibrium prices higher. This of course ignores the fact that it is not a matter of supply but lack of demand as the end consumer in Spain is simply tapped out. But paradropping bundles of euros on an insolvent population is still not feasible so Spain will make do with what it can.

Spain is counting the cost of the collapse of a decade-long property boom that’s sent home prices falling about 30 percent since the start of 2008, driven unemployment to 26 percent and burdened banks with mounting bad loans that have made them wary of extending new credit. A decision by Sareb to raze unfinished properties would demonstrate it makes more sense to knock down homes than try to sell them as an economic slump drags into a sixth year, said Fernando Rodriguez de Acuna, a project manager at Madrid-based real estate consultant RR de Acuna & Asociados.

Naturally, the spin cycle has already been activated: "demolitions are bullish, maybe more bullish than constructions!"

“If demolitions start in sizeable volumes, that could be a positive sign because it would be a recognition that it’s impossible to sell these assets under any circumstances,” Rodriguez de Acuna said by phone. “At least if you knock them down, the land can be put to some other use.”

The one thing about Keynesian "logic" - one can't argue with it. It is rock solid. Just as solid as the capitalization of Spain's "bailout" bad bank, Sareb, which at this rate may need its own bailout quite soon.

Spain set up Sareb last year to absorb the souring real estate assets of eight lenders including the Bankia (BKIA) group that took a combined 41 billion euros of state aid as the government sought European funds to help clean up its banking system.


Sareb has taken on about 200,000 assets. This includes 107,000 properties, 76,000 of which are empty homes, Economy Minister Luis de Guindos told Congress in March. The bad bank plans to sell assets with a value of 1.5 billion euros ($2 billion) this year, he said.


Bids for the first group of properties to be sold, known as “Project Bull,” were due by July 18, according to a spokesman for Sareb who asked not to be named in line with its policy. No decision on the sale has been made, the spokesman said.


Sareb hasn’t identified any building project for demolition yet and has no plans to knock down finished properties, Sareb said in an e-mailed statement today. It would focus on projects that are at an early stage and may pose a safety risk or are breaking urban planning laws as it decides which ones to demolish.


The bad bank’s readiness to consider demolition means it’s recognizing the scale of the excess housing supply that was created before the boom turned to bust, Rodriguez de Acuna said.

In the meantime, actual home sales in Spain have virtually ground to a halt.

Net sales of homes, excluding purchases by banks, dropped to 259,000 in 2012 from 736,000 in 2007, according to RR de Acuna’s analysis based on data from the National Statistics Institute and the College of Property Registrars.

Alas, even when the bulldozers come, prices are likely to continue sliding. For another five years.

Home prices have dropped about 35 percent since their peak in 2007, according to RR Acuna estimates based on home valuation data, said Rodriguez de Acuna. Prices may keep falling for at least a further five years, taking total declines from the top of the market to the bottom to 50 percent, he said.

In retrospect, just like in Japan, what is there to lose? May as well try the nuclear option. We only hope that that phrase is not taken literally, although the grand priests of the dying economic religion will almost certainly suggest growing GDP using just that literal option before all is said and done.