Please find below a selection of news excerpts and information that relate to the Spanish mortgage and property market.
5th Feb 2009
Eurozone rates kept on hold at 2%
The European Central Bank (ECB) has kept interest rates for the 16 countries that use the euro unchanged at 2%.
Rates in the eurozone have been cut four times since September when they stood at 4.25%.
Many analysts expect the cost of borrowing to fall further, with another cut expected in March.
The central bank is trying to revive the eurozone's economy, which is mired in recession. However, it has been more cautious in cutting rates than its counterparts in the US and UK.
The Bank of England cut rates by half a percentage point to 1% earlier on Thursday, the fifth reduction since October when they stood at 5%.
US interest rates are already as low as they can go.
Financial markets are looking for signs that the ECB might follow in the footsteps of the Federal Reserve and the Bank of England and consider more unconventional monetary policy measures.
This could include quantitative easing whereby central banks aim to increase the amount of money flowing in the economy by buying assets such as government bonds from banks. Richard Snook, senior economist at the Centre for Economic and Business Research, says the ECB needs to take bolder action on monetary policy.
"The ECB is clearly behind the curve," he said.
"Global policy rates at zero and coordinated quantitative easing across all major economies is the best remedy for an unprecedented global crisis," he added.
From Reuters - are Spanish banks heading for trouble
Spanish banks' provisions look vulnerable
Spain's banks have withstood the financial crisis better than their European peers, but their uniquely high provisions against bad debts will start to run dry unless the economy improves next year.
As big names in U.S. and European banking have buckled, Spanish banks have so far withstood defaults from failing property developers due to high provisions imposed upon them by the Bank of Spain at the end of Spain's last recession.
But in 2009 they will be hit by a fresh wave of bad debts -- this time from householders who have lost their jobs and cannot pay their mortgages. If the bad news does not end in 2010, Spanish banks could finally be dragged down by the collapse of the country's property bubble.
"If the downturn lasts through 2009 and 2010, the banks will survive the crisis. But if it extends beyond 2010, then they could be in difficulty," Domingo Miron, partner at the Accenture consultancy, said.
While leading Spanish banks have avoided the huge losses posted by other global institutions in 2008, and even reported respectable profits, they have sacrificed some earnings to increase loan loss provisions and dipped into their so-called generic provisions cushion.
"The chinks in the armour are showing and the banks are using generic provisions as bad loans soar. 2009 is going to be a hard year," banking professor and former Dean at the Esade Business School Robert Tornabell said.
JP Morgan analysts expect most banks to opt for accelerated use of their provisions cushion throughout 2009 and 2010 as asset quality deteriorates.
Of the banks which have reported 2008 results so far, Citigroup analysts highlighted high provisions of 462 million euros (320.47 million pounds) at Popular (POP.MC), driven by the steep rise in "voluntary" provisions and property assets impairments.
JP Morgan expects Popular's generic provisions to be enough for the rest of 2009.
Sabadell SAB.MC has not released any of its generic provisions as yet -- using capital gains from asset sales to boost provisioning. But JP Morgan believes it will follow its peers in 2009 and 2010 and begin using its rainy day fund.
CONSERVATIVE PROVISIONING
In the wake of Spain's last economic downturn in 1993, the Bank of Spain obliged all banks and savings banks to set up a special provisions fund to cover future loan losses.
The fund was charged against results and calculated by each institution as a percentage of their total lending.
This provisions cushion has remained mostly intact in the case of all the banks since the regulation was implemented as Spain enjoyed years of an economic bonanza.
Thanks to this, investors have not given Spanish banks nearly so hard a time as they have their foreign rivals.
Shares in Spain's biggest bank, Santander (SAN.MC), lost about 43 percent of their value in 2008, and its nearest rival, BBVA (BBVA.MC), slightly more at 48 percent. In comparison, Citigroup (C.N) has sunk almost 90 percent, RBS (RBS.L) 93 percent and Deutsche Bank (DBKGn.DE) has retreated 73 percent.
Nonetheless, the government, which has only had to provide a fraction of the amount of aid to banks compared with elsewhere in Europe, and has not had to take shares in any institution, has warned that consolidation in the sector is likely.
While the Spanish banking system has dodged the U.S. subprime bullets over the last 18 months, bankers now face a home market in which unemployment has nearly doubled to nearly 14 percent and is still rising fast.
"The property-related loan losses have now been more or less absorbed by the main banks .... they are almost a thing of the past. The problem in 2009 will not be property sector-related bad debts, but mortgage defaults as unemployment soars," Miron said.
But the banks can still report profits even with a bad loans ratio of between 7 and 8 percent, he said.
STRESS TEST
The bigger banks that have announced 2008 results so far have reported non-performing loans ratios of 1.4-2.8 percent, although Spain's second largest savings bank Caja Madrid CAJAM.UL sent shivers down spines when it forecast a ratio of 7 percent for this year, up from 4.87 percent end-2008.
The Bank of Spain says an NPL ratio of 9 percent will represent a stress test for the banks, although it thinks they have sufficient generic provisions and capacity for one-time gains from potential asset sales over the next two years to survive.
"I think that is over optimistic ... In February some banks will have already exceeded a ratio of 4 percent," Tornabell said.
"And we will see increasing amounts of bad debts in the next six months. In my opinion the ratio of doubtful assets to total credit could be on average about 5 percent," he said.
The banks themselves have been upbeat about how long their generic provisions can see them through the crisis, with BBVA, Popular and Banesto (BTO.MC) forecasting their provisions will last through 2009 and 2010.
Miron ruled out any Spanish bank requiring a government bailout, so long as the economy begins to improve by 2011.
A leading U.S. asset manager agreed, although he said Spain's savings banks, which are more exposed to the Spanish property market, are "definitely suffering."
"But the Bank of Spain would push for consolidation in that sector before any bailout was necessary," he said.
From FORBES 5th Feb 2009
Santander's Risky Business
The bank posts a strong profit but its big stakes in the British and Spanish mortgage markets may come back to bite.
Spain's Banco Santander might have made a successful push into the British mortgage market, but this could prove a risky strategy for the bank whose annual results showed a sharp increase in loan loss charges on Thursday.
Shares of the Spanish bank fell 2.0%, or 12 euro cents (15 cents), to 6.03 euros ($7.73) in Madrid as it announced that loans in arrears as a percentage of its total lending climbed to 2.04% at the end of December, from 0.95% a year ago, revealing that the economic downturn in Spain and Britain was hitting Santander hard. In Spain, the rate of bad loans rose to 2.58%, costing the bank 3.6 billion euros ($4.6 billlion).
The scale of loan losses for Santander (nyse: STD - news - people ) are crucial, as analysts await the impact of a recession in Britain and Spain (which have both suffered from property market bubbles) and a slowdown in South America, the Spanish bank's three main markets. Santander managed to avoid losses on subprime mortgage securities thanks to tough banking regulations in Spain, so it has been taking advantage of its relatively strong balance sheet to expand its lending business, particularly in the United Kingdom.
At Abbey National, the British mortgage business Santander bought in 2004, net mortgage lending rose 28.0% to 11.1 billion pounds ($14.3 billion) during 2008, taking its share of the total British mortgage market to 28.9% from 8.0%, benefiting as its rivals with weaker balance sheets were less reluctant to lend.
Yet while this push could position Santander in prime position at the end of the downturn, it is still a risky strategy, particularly given the increasingly dismal outlook for the British economy (See "Santander's Big Test.")
The bank is putting a brave face on the situation, keeping its annual dividend for 2008 at the same level as the previous year.
Santander had pre-announced its headline results last week, saying net profit for the fourth quarter fell 24.0% to 1.9 billion euros ($2.4 billion), while annual profits fell 2.0% to 8.9 billion euros ($11.4 billion). This is in stark contrast to Deutsche Bank (nyse: DB - news - people ), which reported a $5.0 billion loss for 2008.
Santander was forced to set aside 500.0 million euros ($641.3 million) to cover compensation for clients of its Optimal Investment Fund, which was exposed to Bernard Madoff's $50.0 billion alleged fraud.
From Bloomberg. UK rates are cut but ECB holds firm at 2%
Bank of England Cuts Main Rate a Half Point to 1% (Update6)
Feb. 5 - The Bank of England lowered the benchmark interest rate to 1 percent, extending the most aggressive round of cuts in its three-century history as officials try to limit fallout from the deepening recession.
The nine-member Monetary Policy Committee, led by Governor Mervyn King, cut the bank rate to 1 percent from 1.5 percent. That’s the lowest since the central bank was founding in 1694 by William III to fund a war against France. The move matched the median estimate of 61 economists of a Bloomberg News survey.
The U.K. economy will shrink the most since 1946 this year and faster than any other industrialized country, International Monetary Fund forecasts show. Prime Minister Gordon Brown’s government has given the central bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper as interest rates lose their potency to aid economic growth.
“The global economy is in the throes of a severe and synchronized downturn,” the central bank said in a statement. “Business and household sentiment in many countries has deteriorated. The supply of credit remains constrained.” In Britain, “credit conditions faced by companies and households have tightened further,” it said.
King will present the bank’s updated economic forecasts on Feb. 11. Minutes of this month’s meeting, showing how the members voted, will be published on Feb. 18.
The pound rose against the dollar and the euro, trading at $1.4635 and 87.36 pence per euro as of 3:10 p.m. in London.
Global Rate Cuts
The Bank of England has now lowered its rate by 4 percentage points since October. The U.S. Federal Reserve has reduced its key rate to a range between zero and 0.25 percent. The European Central Bank kept its rate at 2 percent today.
ECB President Jean-Claude Trichet, speaking to reporters in Frankfurt, said he “doesn’t exclude” a half-point interest- rate cut for the 16-country euro area in March.
Central banks in South Africa and the Czech Republic joined the U.K. in cutting interest rates today to fight the global slump. South Africa’s central bank cut its benchmark rate by 1 percentage point, the biggest reduction in more than five years, to 10.5 percent. The Czech central bank lowered the key rate for the third consecutive time, by half a point to 1.75 percent.
“We have a deep recession and a credit crunch,” said Michael Saunders, chief Western European economist at Citigroup Inc. in London. “Why wait? The debate is about how the economy can ever recover, and the Bank of England has the answer to that in its hands.”
Undershoot Risk
The bank said there is “a substantial risk” that inflation will fall too far below the 2 percent target even though rate cuts since October, a 20 billion-pound package of tax cuts, cheaper commodities and a sharp drop in the value of the pound are likely to provide “a considerable stimulus.”
“The key is the line that credit conditions have tightened further,” Brian Hilliard, chief U.K. economist at Societe Generale SA in London, said on Bloomberg Television. “That’s the key emphasis for the government and the bank. They’ve got to continue to do things about it. And the asset purchase facility is the next button to press.”
King’s next step may be to pump additional money into the financial system. He said Jan. 20 that the central bank will buy “high-quality” assets within “weeks and not months” to ease market strains, a policy in line with similar measures pursued by Fed Chairman Ben S. Bernanke.
Brown and King are trying to rescue an economy that will contract 2.8 percent in 2009, according to IMF forecasts. House prices fell an annual 16.4 percent in January, mortgage lender Halifax said today.
Job Cuts
Ford Motor Co. said today it plans to cut up to 850 jobs in the U.K. as demand for autos and commercial vans slumps. As many as 5,000 British companies may file for bankruptcy this year, a report by accounting and insolvency firm KPMG showed.
The downturn is cooling inflation. Consumer prices rose 3.1 percent from a year earlier in December, compared with 4.1 percent the previous month, the biggest drop in the annual rate since records began in 1997. The central bank’s target is to keep inflation at 2 percent.
Brown said yesterday that the world is suffering a “depression,” suggesting he may increase measures to stimulate the economy. The government has already pledged hundred of billions of pounds to prop up banks, and the pound has fallen 26 percent against the dollar and 16 percent against the euro in the past year, making British exports cheaper.
‘Stimulus Factors’
“There are many stimulus factors in place, cuts in interest rates, various fiscal packages will help,” said Nick Bate, an economist at Merrill Lynch & Co. in London and a former Treasury official. “But given that we’re in a world where many central banks are cutting severely, the ability to fine tune the economy has passed.”
The Federation of Small Businesses said yesterday that recent interest rate cuts aren’t helping companies because they cannot get access to loans. More than two-thirds of small businesses wanted the central bank to keep the rate unchanged, according to an FSB poll. The Building Societies Association, representing customer-owned lenders, also called for no change.
For now, the central bank may still have little choice but to keep cutting.
“The fundamentals are still weak and there is still some scope for orthodox policy easing,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “It’s preferable to nudge rates further now than to turn to the printing presses.”
Is the mortgage situation in Dubai even worse than in Spain ?
Amlak-Tamweel deal rethink
Dubai: The UAE government is rethinking the merger of mortgage lenders Amlak and Tamweel and other options are being explored by a new committee, according to the Ministry of Finance.
The Ministry of Finance has formed a Steering Committee, headed by Sultan Bin Saeed Al Mansouri, UAE Minister of Economy, which aims to review Amlak and Tamweel and recommend possible ways the two companies can go forward.
"The Steering Committee appointed by the Cabinet is reviewing the operations of Amlak and Tamweel. It is also evaluating their performances in light of the emerging economic situation.
"Various options are being considered in the long term interests of the mortgage market and investors. Merger continues to be one of the options, however, not a definite option," Al Mansouri told Gulf News yesterday.
After reviewing both Amlak and Tamweel, the committee is expected to give its recommendation to the government at the end of this month, the minister said.
"Mortgage finance has been one of the key drivers of real estate growth in the UAE. The ripple effects of the global financial meltdown have necessitated a renewed approach to the business models of Amlak and Tamweel," Al Mansouri said.
The Steering Committee will comprise experts from all the ministries and regulatory bodies.
Up until very recently, a merger of Amlak and Tamweel under the Emirates Development Bank was a sure thing. However, it now seems a variety of other avenues are being explored.
The UAE's mortgage and home financing sector has huge potential and many people wishing to buy property in Dubai are waiting only for mortgages to become available in the market. A quick injection of liquidity could help accelerate business activities in Dubai's property sector.
"The committee will structure solutions and evaluate ways in which Amlak and Tamweel can unlock these opportunities in the short to medium term. The proposal may also look at reconstructing the business and developing a sound, long-term business model," the minister added. It is hoped the proposal will infuse greater stability into the UAE's property industry.
However, some analysts say that the only viable alternative is to let the companies go under.
"The key question is: are you better off letting these companies go bankrupt? Bailing out just makes things worse. If the companies don't merge, then other options include letting them go under. Or they could not merge and [the government]) could throw more money at both of them, which is pointless. It's like burning money to save the sukuk bond-holders of Amlak," Barmak Besharaty, managing director of Al Mas Capital, said.
"The correct thing to do is let these companies sink and create another, more nimble entity," Besharaty added.
Other analysts say yet another option is on the table.
"They [Amlak and Tamweel] have substantial losses that need capitalisation from somewhere. Merging two high-risk [companies] together which have, essentially, the same problems, doesn't necessarily solve the problem, but shifts the problem around," Raj Madha, senior research analyst (banking) at EFG-Hermes, said.
"Some sort of nationalisation seems the obvious choice," Madha added.
Spain Feels Jobless Pain
Country's unemployment figures hit all-time high with levels set to reach 18.7% by 2011.
Spanish unemployment hit its biggest ever monthly rise in January, according to the country's Labor Ministry.
Unemployment rose by 199,000 last month, or 6.0%, bringing the total to 3.3 million, the highest jump on record since Spain started using its current method for recording ranks in 1996.
Over the past year, unemployment has reached more than 1.0 million, and at 14.4%, the country's rate is the highest in the European Union. Spanish unemployment by far exceeds jobless rates in other E.U. countries with the Netherlands' rate of 2.7%, the U.K.'s 6.1% and France's 7.9%, according to the E.U.'s statistics office Eurostat.
"We continue to be affected by the serious international financial crisis, the lack of liquidity and the fall in consumer spending," said Maravillas Rojo, Spain's employment secretary.
Analysts have warned things could get worse. Martin Van Vliet, a senior economist at ING, expects Spanish unemployment to reach 18.0% by the beginning of 2010. Van Vliet's forecast exceeds that of the European Commission, which expects unemployment levels to increase by 16.1% in 2010 and 18.7% the following year.
"Unemployment is posing a major threat to the ailing housing sector," Van Vliet said. "Once people lose their jobs, it becomes difficult to get a job and then they struggle to service their monthly mortgage payments."
Spain's property sector has been one of the worst hit during the current subprime mortgage crisis with home builders filing for administration as prices fall and buyers are unable to secure financing. Last year, Martinsa Fadesa was one of many companies to go bust as it struggled to raise funds and meet debt payments. (See "Party Is Over For Martinsa Fadesa.")
"The danger is that the surge in unemployment could feed back into an even steeper downturn in the housing crisis," said Van Vliet. You could end up in a situation where people won't be able to retain their homes and this would put more pressure on the market. The government needs to break the vicious cycle very quickly."
Extraordinary shareholders meeting in Banco Santander.
Emilio Botín, the Chairman of Banco Santander, has told an extraordinary meeting of shareholders today that he is to study the possibility of taking legal action to defend the bank and its clients in the face of the Bernard Madoff scandal. Clients of the bank lost 2.3 billion and the bank lost 17 million € of its own funds in the fraud.
The Chairman said that the bank has 84 billion € liquidity and said it had not closed the credit tap to borrowers.
Botín said that the annual results of Santander were ‘magnificent’.
The Euribor rate, used to set mortgages in Spain, is now down to levels last seen in September 2005. The monthly average rate is now 2.69% while the daily rate is down now to 2.347%.
December prices for industrial items fell for the fifth consecutive month and the first time annually since 2002. Prices fell by 2.2% with respect to November according to INE National Statistics Institute.
Leading the fall in prices was in the refining of petrol, down 21%.
The ING bank has announced 7,000 jobs are to be lost this year, but they say that the Spanish branch of the bank will not be affected by the cut-backs.
Repsol has announced three new gas finds in Algeria. The first tests think that more than 1 billion cubic metres of gas a day, 1% of the national consumption in Spain, could come from the new find in the Sahara Desert.
It comes after General Gadaffi again mentioned the nationalising of petrol companies, including Repsol in Libya, during an official dinner in the presence of King Juan Carlos and the Chairman of Repsol.
The white labelled products in supermarkets are seeing record sales in Spain as people look for bargains. They now amount to 32% of sales, the highest percentage seen anywhere in Europe according to the latest data.
British Airways has announced that it does not want to merge with Iberia given the current situation on the stock market. Willie Walsh told the Financial Times that the airline was not prepared to meet the merger now, and said part of the problem was the loss of value of sterling against the Euro.
This artile below from The Times
Britain is not Iceland. Is EU the next Japan?
What went wrong? The past few days should have been positive for the economy and the banking system but we were plunged into a mini-crisis.
I think I know. It is easy for pundits and opposition politicians to criticise but this is difficult stuff. Governments love precedent but there was not one here for, first, a rescue of the banking system and then measures to get damaged banks lending again.
So there is bound to be trial and error, though the package announced last week was not just thrown together. I was talking to Alistair Darling many weeks ago about changing Northern Rock’s role from drain on the mortgage market to net lender.
Guarantees for new mortgage-backed securities had been in the offing since Sir James Crosby recommended them in November. Other elements of the package, including Bank of England purchases of corporate bonds, commercial paper and syndicated loans, came straight out of the Federal Reserve textbook.
The problem was that the government allowed speculation to build about a “bad bank” to take on banks’ toxic assets, when the work had not been done on it. When the chancellor announced he would instead insure the banks against some losses on these toxic assets, but that it was impossible to say how big they would be, the vultures began to circle. Even that would not have raised the alarm if not for Royal Bank of Scotland’s announcement of losses of £7 billion to £8 billion for 2008, plus up to £20 billion of goodwill write-downs on its ABN-Amro acquisition.
Whose daft idea was it to spoil the banking package with such dire news, which set the tone for a bad week for bank shares and the pound? I present as evidence Gordon Brown’s interview last weekend when he said banks should disclose their losses, but the government insists that RBS itself felt obliged to issue its profit warning.
That said, reaction in recent days verged on the hysterical. We have not seen the last of government efforts in this field, and may see full nationalisation of some banks, plus a “bad bank”. But the measures were helpful, including the Financial Service Authority’s relaxation of its capital rules.
People get things wrong. One scare story is that UK banks have foreign-currency liabilities equivalent to three times gross domestic product. If the government was liable for these, we could be in trouble.
But this refers to all banks in London, whether owned by EU countries, America or Japan. These foreign-currency liabilities are £4.6 trillion, which is indeed about three times our GDP. But they also have foreign-currency assets of £4.7 trillion.
British banks account for less than a third of these liabilities, just under £1.5 trillion, with foreign-currency assets of more than £1.5 trillion. Compared with Switzer-land, where such liabilities are 2½ times GDP, or Iceland’s seven, the UK’s liabilities – roughly equal to GDP – look comfortable.
There are others ways in which the “Reykjavik-on-Thames” suggestion is ridiculous. I am told there was never a possibility ratings agencies would downgrade the AAA rating of Britain’s sovereign debt and, sure enough, Moody’s reaffirmed it, saying the UK was not even an outlier among AAA economies. But the rumour was reported.
Ben Broadbent of Goldman Sachs has taken the government’s “toxic” assets programme, made aggressive assumptions, and concluded the maximum liability for taxpayers could be £120 billion, 8% of GDP, spread over several years. It is a lot, but a far cry from suggestions of many hundreds of billions, and should be partly offset by profits on other elements of the rescue. Broadbent concludes that, with UK government debt low by international standards, there was no case for a downgrade.
What should we make of the views of Jim Rogers? The “investment guru” said: “I would urge you to sell any sterling you might have. It’s finished. I hate to say it, but I would not put any money in the UK.”
Rogers has probably taken enough punishment but, apart from the fact that it is nonsense – the world’s fourth-largest reserve currency isn’t finished – and puzzlement that anybody gives him publicity, I found it mildly reassuring. He said much the same about the dollar in April, since when its average value has risen 12%.
Last June he said: “The bull market for oil has many years to go before it peters out.” We know what happened next. He was speaking from Singapore, where he has moved to see the Asian miracle at first hand, and where the economy is officially expected to shrink 5% this year.
The same goes for Crispin Odey, the hedge-fund manager, who said the UK was “bankrupt”. Odey, who makes money from short-selling, appears to have been put on Earth to give hedge funds a bad name.
Some hedge funds and trading arms of investment banks, having wrought havoc elsewhere, now see profit in currency volatility. There is also an element of cannibalism at work, heavy selling of bank shares being often provoked by bearish research notes issued by other banks.
For some, the more mayhem the better. But it is important to inject balance and this is not political. Wishing ill on the economy, banks or currency to hasten Brown’s departure is strange. Long after he has gone, we would still be suffering.
Currencies rise and fall. Sterling’s problems are partly related to the curtailment of international banking flows into the City and to the view among some that Britain will suffer a much worse recession than other big economies after Friday’s figures showed a 1.5% drop in GDP in the fourth quarter. But Germany and America look at the very least similarly afflicted.
Some experts such as Neil Mackinnon, chief economist at the ECU Group, also think sterling is a proxy for global financial risk. When risk aversion rises in markets, sterling gets clobbered. These things pass. The pound was once a petrocurrency.
Episodes of sterling weakness are followed by periods when it rises too much. After the 1976 IMF crisis, it rose from $1.65 to above $2.40. Between 1996 and 1998 sterling climbed 25%. Exporters hope that at least some of today’s depreciation holds.
If there was a currency I would be worried about at the moment, however, it would be the euro. Three of its members, Greece, Portugal and Spain, have had their credit ratings downgraded and Ireland is on “negative watch”. The European Central Bank, having started well in the crisis, is now dragging its feet and seems in a similar state of denial to the Bank of Japan in the early 1990s, before the “lost decade”.
European finance ministers last week rejected proposals to coordinate banking bailouts. Again, this looks like foot-drag-ging. Britain is not Iceland. But Europe, if it is not careful, could be the next Japan.
PS: I have had requests for an update on my skip index, an informal indicator based on the number of builders’ skips in my street. It held up until Christmas, based on “can’t move, will improve” demand, but now stands at zero. No green shoots there.
But something odd is happening. Recessions are grim but you expect compensations such as quiet roads, empty trains and helpful shop assistants.
This may be a London thing, but to me roads are busier and on train and Tube journeys I get closer to fellow passengers than is comfortable. As for shops, maybe the retail trade is too miserable, though it is common to find that, when you are ready to buy, the item is not in stock.
Finally, unfinished business from last week when I presented a calculation showing a 2% interest rate with zero inflation was better for savers than 5% with 3% inflation, because of tax. Plenty of pensioners point out that this may apply to young whippersnappers wanting to increase the real value of capital but not to most pensioners, drawing down savings and wanting maximum cash income from it. An interesting debate.
Fromthe Financial Times
The dramatic slide of sterling against the euro and other currencies since the start of last year has created big winners and big losers in the world of residential property. In the former category are international buyers in the UK, and especially in London, who are combining falling prices with improved exchange rates to secure deals that cost them 40-50 per cent less in their own currencies than they would have a year ago. In the latter are British buyers abroad, who can no longer afford the gîtes and haciendas they once coveted or have found themselves struggling to cover the monthly payments on their foreign-currency-based mortgages.
Sammy Abd Kerim, an Egyptian businessman based in Cairo, is among the fortunate ones. He started looking for a London apartment in the summer of 2007 through estate agency Kay & Co and quickly found an ideal three-bedroom property on the third floor of a grand block overlooking Hyde Park. “I come to [the city] four or five times a year so I felt it would be good to have a base where I could stay and bring my family,” he explains.
He offered £2.1m for the flat, slightly below the asking price of £2.35m, but London’s prime market was still bubbling at the time and the seller rejected it. “I walked away at the time and continued to look around,” Abd Kerim says, “but in autumn last year the sellers reduced it to £2.1m and we picked up our discussion. Now I am expecting to pay £1.9m, which amounts to a reduction of almost 20 per cent on the original asking price.” Even more importantly, since the Egyptian pound gained 26 per cent against sterling in 2008, he saved another £500,000.
A flat that cost £3m in 2007 is now worth £2.4m but the effective discount is even greater for foreign buyers
He acknowledges that the flat’s value might fall further over the next few months but still thinks now is the right time to buy. The market “may lose another 5 per cent but no more and prices will rise again in due course”, he says. “I don’t feel the need to wait longer. Even if the market falls another 10 per cent, I have saved a great deal of money on the currency exchange. In fact, I am thinking of using it to invest in a second flat to rent out, as a bonus.”
Estate agents in the UK say such attitudes are increasingly common and are now resting their hopes on buyers like Abd Kerim to kick-start sales. They expect the most interest to be in areas and segments of the London market that have been hit hardest by City redundancies, including Kensington, Notting Hill and Holland Park (where Savills says prices fell more than 11 per cent in the past quarter) and in the £1m-£2.5m price range (where Knight Frank estimates average declines at 22 per cent since the peak). They say there is rising interest not only from the Middle East – with buyer numbers up 70 per cent from the end of 2007 to the end of last year, according to Knight Frank – but also from Europe, since the euro gained 30 per cent against sterling in 2008; the US, with the dollar up a relative 35 per cent; and Asia, with the yen up 66 per cent.
“People who stopped looking in 2007 because prices were ludicrous are returning,” says Martin Bikhit at Kay & Co. “Even our toughest, pickiest clients are now seriously looking around because they recognise this is a limited window of opportunity. Two years ago only 20 per cent of our work came from international buyers; now I guess they account for 80 per cent.”
Camilla Dell at property search agency Black Brick confirms the trend. “We’re seeing a big increase in Middle Eastern, African and other dollar-linked buyers, who are now showing strong renewed interest in the London market as a great investment opportunity,” she says.
Commentary from Julian Sedgwick at Jones Lang LaSalle highlights an influx of south-east Asians trying to take advantage of “a clear competitive buying advantage” – with “one particular high-net-worth family in Singapore already [allocating] just over £100m to invest in London prime residential and commercial property over the next 12 months” – while Charlie Parkin at Aylesford has noticed a surge in interest from Italians, thanks to euro strength and extensive coverage of the UK capital’s suddenly affordable homes in their local press. “Unlike some other Europeans, they also really like investing in real estate,” he adds. “They consider it to be safer than the stock market.”
Buying agent Charles McDowell of McDowell Properties says he’s also working with “three or four” European clients who “now regard London as the place to be, since they can buy in effect at half price compared to 18 months ago” and with two Americans who “feel the same”. In the latter category is John Wilson, who is relocating from Los Angeles to run a finance company and now looking for a place to live in Chelsea and Kensington. “We are now more inclined to buy rather than rent but we are cautious on price,” says his wife, Mary Lou. “We don’t want to be caught out as we were in the 1980s in California, where values dropped by 60 per cent and took 10 years to recover.”
Indeed, most international buyers are looking for deep discounts. But their presence is nonetheless good for British sellers who intend to buy into the same depressed market and, eventually, it will benefit British buyers as deal-flow picks up and spreads. “The start of the recovery may well be driven by [these] investments,” says Savills’ research director, Yolande Barnes. The precedent is 1993, when, after a disastrous year for sterling, Middle Eastern, European and American buyers revived a collapsed London market.
Meanwhile, at the other end of the widening currency divide are Britons with holiday homes and mortgages abroad. Take Anne Parry, director of a regional PR company in the UK, and her business partner, Edward Carter, who in 2006 bought a two-bedroom apartment in the Vilamoura resort in Portugal’s Algarve region. They paid €266,000, plus the cost of a fit-out, and covered about 60 per cent of it with an interest-only mortgage from a Portuguese bank.
Unlike elsewhere in Europe, the resort has not yet seen property price depreciation, with similar apartments recently selling for €330,000. As a result, Parry, who uses the property herself a few times a year, and Carter still believe in their investment. “It’s in a great location, with two of the best beaches in Europe and seven championship golf courses nearby, and [it] will gain value when the nearby marina development is extended,” she says. “Over the long term we’re not losing because the property is valued in euros and so has gained value in sterling terms,” he adds.
But they acknowledge that the currency swing has caused them headaches. “We are only paying 3 per cent [on our mortgage] but when we started we were getting €1.45 to the pound and now we’re getting around €1.06, so it’s costing us 27 per cent more to service,” Parry says. Plus, the economic crisis has also made securing holiday rental income more difficult. “We aim to cover our mortgage interest and outgoings through letting but we’re really having to be very proactive about marketing at present.”
There have been a few holidaymakers from Ireland and Portugal, who pay in euros, but most are sterling-paying Britons, whose money has to be converted back to euros before the bills can be paid. To make matters worse, as with buyers in the UK, everyone is looking for a bargain. In order to stay competitive, Parry admits, “we’re not setting the rent to reflect our full increased costs”.
Still, the pair are sticking to a long-term view. “We’ll hold [the apartment] at least until the marina development is complete,” Carter says. “I think sterling will strengthen in due course so this is a low period and we’re looking beyond that.”
Currency exchange companies such as Caxton FX and FairFX report that many British homeowners in Europe are less sanguine, however. Some who never intended to let their condos and villas are now doing so as a way to offset costs, while others are selling up, trying to take advantage of the euro’s strength, particularly if the economic downturn has not yet pulled their property values below the levels at which they bought. For example, one Caxton client bought a house in France with cash in 2002 when £1 was worth €1.62, then sold last autumn, when the ratio was £1 to €1.12. His gain on the sterling purchase price was £140,000, with more than £100,000 coming from the currency trade.
If that is one silver lining to the euro’s strength, another is that European developers are also now offering “generous discounts” to sterling buyers, says James Hickman of Caxton FX. “Others have introduced a scheme where buyers pay a small deposit but then defer the rest of the payment for up to five years and pay only interest on it meanwhile,” he says.
Julian Cunningham of estate agency Knight Frank confirms that such “solutions” are increasingly common. “It depends on the developer’s situation but typically at least 75 per cent [of the purchase cost] is postponed,” he says. “That gives buyers time to plan their finances. It’s not a new initiative but now it’s a key element of any deal.”
Buyers eager to bag a holiday home bargain while European markets remain depressed are also getting creative themselves. “A couple of recent British purchases have gone through where, instead of converting their pounds at an unfavourable rate, the buyers opened a sterling interest-bearing deposit account with a Spanish bank,” says Barbara Wood of The Property Finders in Spain. “Against this, they took out a personal loan in euros to pay the sellers. The difference between the interest earned on the sterling deposit and the interest on the loan costs them about 1 per cent. But they can wait until sterling recovers and then convert their funds and pay off the loan...”
In the end, second home purchases abroad are lifestyle decisions as much as investments. Culture-hungry jet-setters tend to crave pieds-à-terre in London whatever the cost, while Britons keen on warm-weather sailing, golfing and surfing will always dream of their own places in the sun. But until prospective buyers engage in substantial and prescient hedging – locking in attractive exchange rates through forward contracts – currency swings like the ones we saw last year will continue to have dramatic fall-out around the world.
News from Italy regarding the EURIBOR
Rome, 22 gen (Velino) - The three months European Inter banking Offered Rate was fixed today at 2.25 per cent, down from yesterday's 2.31 and the lowest rate since October 28, 2005. The news, which means further relief for variable rate mortgage holders, since the three months rate is used as a benchmark by most banks in their variable rate, is a further consequence of the latest cut of interest rates by the European Central Bank. But at the same time it means that conditions are normal again from the point of view of the credit crunch experienced last autumn. Nowadays, as a matter of fact, the spread between base interest rate and the three months EURIBOR is just 0.25 per cent, while last October, at the highest point of the credit crunch, the spread over the base rate was 1.13 per cent.
The three months European Inter banking Offered Rate was fixed today at 2.25 per cent, down from yesterday's 2.31 and the lowest rate since October 28, 2005. The news, which means further relief for variable rate mortgage holders, since the three months rate is used as a benchmark by most banks in their variable rate, is a further consequence of the latest cut of interest rates by the European Central Bank. But at the same time it means that conditions are normal again from the point of view of the credit crunch experienced last autumn. Nowadays, as a matter of fact, the spread between base interest rate and the three months EURIBOR is just 0.25 per cent, while last October, at the highest point of the credit crunch, the spread over the base rate was 1.13 per cent.
Official Credit Institute not been supported by Spanish banks.
A good number of banks are reported to be turning their backs on the Official Credit Institute, ICO, in its attempts to give credit to individuals and professionals. In particular the banks seem reticent to agree to any postponement in mortgage payments, one of the main measures of the Government’s initiative to fight the crisis.
So far the Government has resisted calls from the Partido Popular opposition to convert the ICO into a public bank.
Latest numbers in Spain show that the banks are still not offering credit, with numbers down 95%. Representatives of the main banks could be called to explain their policies before Congress. The banks defence is that they are not granting credit as nobody is asking for it.
Bankinter has announced a 30% drop in profits for 2008, but if the extraordinary operations are taken out of both the 2007 and the 2008 numbers, there is an actual 1.6% rise in profits. The bank admits that bad debts quadrupled over the year to reach 1.4%.
Meanwhile as the power struggle continues in the Partido Popular, allegations of illegal spying included, the CECA Savings Banks association is calling for a legal reform to reduce the political influence. The Ministry for the Economy has not ruled out the possibility, but added that it would not solve a problem for the Partido Popular.
President Gaddafi of Libya has threatened to nationalise the activities of Spanish multinational company Repsol in the country. El Mundo says that Libya wants to oblige petrol companies to contribute to finance compensation payments for the terrorist attacks carried out by the Libyan leader during his terrorist stage. The paper says he recognises the need to control the production of crude in order to lift the price.
Car production in Spain has fallen back to levels last seen in 1997, down 12% in 2008 compared to 2007.
In 2008, 2,541,644 cars left Spanish factories, nearly 350,000 fewer than in 2007. The car market fell by more than that for industrial vehicles.
From Spanish Property Insight
The number of Spanish properties bought and sold in October (39,201) was 27.5% less than the same time last year, according to the latest figures from the Spain’s National Institute of Statistics (INE). In the first 10 months of the year, sales are down by 28.4% compared to last year. That means that the Spanish property market has shrunk by almost 30% in a year.
Figures also released by the INE reveal that new mortgage lending fell by 40.7% in the same period, which helps to explain the severe market contraction. Mortgage lending in Spain, as elsewhere, has been brought to heel by the credit crunch.
The resale market has been hit particularly hard, with sales in October down 43% year on year, and by 38.7% in the first 10 months of the year. Resales fell by 65.2% in the Balearics, and by 44.7% in Catalonia.
New build transactions, on the other hand, were only down 8.7% in October, and 13.7% on an accumulated basis, suggesting that the new build sector is managing much better in the market downturn. In reality, this is not the case. Thanks to long sales cycles in the new build market, the INE’s figures reflect sales originated in better times. New sales by developers have collapsed this year, a fact that we can expect to show up sooner or later in the INE’s figures.
Gustavo Samayoa, head of a Spanish consumer group, points out that the Spanish real estate market is just going through a necessary adjustment. “It was clear that the resale housing market was going to crash down because it suffered from tremendous inflation,” says Samayoa, quoted in the Spanish daily ‘La Vanguardia. “It had drawn level with the market for newly built property, with exorbitant prices.
The market is not suffering from a lack of demand, but from a lack of financing, argues Samayoa. Banks now lend less than 80% of a mortgage valuation, and ask for guarantees that many borrowers cannot hope to provide.
Pedro Pérez, president of the G-14 developer association, also blames the banks for the plunge in demand and transactions. “Without financing, there are no transactions,” says Pérez, quoted in La Vanguardia. According to Pérez, one in two sales fell apart in 2008 thanks to financing problems.
“If there are no loans who is going to buy?” asks Santiago Baena, president of the API real estate association, quoted in La Vanguardia. Baena does not expect the situation to stabilise until the autumn.
From TypicallySpanish
Resale house prices down by 43% year on year in Spain.
House sales in Spain fell, year on year, by 27.7% in October, with the fall as much as 43% in the case of resale property. The numbers come from the National Statistics Institute and show that more than half the house sales took place in just four of Spain’s regions – Andalucía, Valencia, Madrid and Cataluña.
Mortgage credits awarded to families in Spain fell dramatically in November. Latest datas say the number of new mortgages awarded by banks and savings banks here in November was 52% down on the same month in 2007 at 4.848 billion €. The numbers are provisional data from the Bank of Spain.
The Euribor rate, used to set most of the mortgages in Spain, is expected to continue to fall this year to reach levels of around 2%. Yesterday its daily rate fell to 2.95%, its lowest since February 2006, according to the Bank of Spain.
Pymes small businesses in Spain can now ask for new credits against the crisis from the Official Credit Institute, ICO, who are granting money if it is used for increasing circulating cash – and is spent on power bills, raw materials and wages. The new fund has 10 billion € for small businesses.
Banco Santander has withdrawn the forecast of a profit of 10 billion € which was forecast by Emilio Botín last June.
Hit by the Lehman Brothers and Madoff scandals, it’s the first time the midyear forecast has not been met in many years. Now profits of some 2 billion will be made in the last quarter, to give an annual profit of something over 9 billion.
The January sales reach all of Spain today, although some stores started on January 2 this year in Madrid, Extremadura, Andalucía and Murcia.
Discounts of upto 70% are found in the first days of the offers as stores try to build up cash in the face of the credit crunch and poor December sales figures.
The La Caixa savings bank and La Generalitat, Catalan regional government, are to finance an increase in capital in the troubled airline Spanair. This will go ahead once their purchase of the company has been confirmed.
Joan Gaspart, head of tourism in Barcelona, is heading the operation to buy the company, and is looking for partners to renew the fleet.
Chaos continues at terminal four in Barajas Airport in Madrid with delays reported today on half the flights.
Iberia has cancelled 16 flights as the SEPLA pilots unofficial work to rule continues, and services are also being affected by the freezing conditions across Europe.
Meetings between the company and the pilots continue today.
The latest advanced inflation figure for Spain of 1.5%, has placed inflation here lower than the European average for for the first time. The harmonised inflation rate for the rest of the continent is 1.6%. There are some concerns among experts that Spain could be heading towards deflation.
A news story below from the Economic Times, commenting on the Euribor interbank rates and the benefits for holders of Spanish mortgages.
Eurozone banks still stocking cash
FRANKFURT: The European Central Bank saw strong demand for its weekly loans on Monday, with 600 commercial banks snapping up more than 216 bn euros
(300 bn dollars) although the ECB forecast a surplus of cash on interbank markets.
Commercial banks also parked higher amounts of cash in overnight accounts with the ECB even as tension on interbank markets eased, which Bank of America economist Gilles Moec termed a "slightly scary" trend by commercial banks.
"It means they are stressed that they want to keep as much liquidity as possible, and that they don't find any other use for their liquidity," Moec told media.
"On the positive side of things, interbank interest rates are falling," he added, noting that the reference three-month London Interbank Offered Rate (LIBOR) for interbank loans on Monday was 2.84 per cent.
That was much closer to the ECB's benchmark lending rate of 2.50 per cent than has been the case for much of 2008, indicating that tension had eased on markets that are crucial for extending credit to the wider economy.
"That is extremely helpful," Moec explained, "for Spanish mortgage holders for example who were directly hit by the increase in the LIBOR" last year.
But, the economist continued, "when you look at the continuing skewness of bank behaviour towards liquidity there is no change over the last few months."
The ECB and other major central banks have supplied unlimited amounts of cash to money markets at low fixed interest rates to jumpstart bank lending, but the banks continue to hoard cash.
They prefer to pay a small penalty by depositing cash back with the central bank rather than to lend it to other banks amid chronic insecurity over their partner's creditworthiness, Moec said.
Money markets froze after the US market for high-risk, or subprime mortgages collapsed in mid 2007, and locked tighter after the US investment bank Lehman Brothers declared bankruptcy in mid September.
Central banks have thus become essentially the only providers of credit, assuming a key role that commercial banks used to have with respect to one another.
"We have the ECB taking over the interbank market but banks have not changed," Moec concluded.