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Could the financial reform accelerate the prices decline?

The Spanish real estate market might face an imminent change in the price of its real estate holdings, due to the reform of the financial system being prepared by the Government. Luis de Guindos, the Economy Minister, had a clear message early this week: “Banks have one year to stop speculating and set their real estate stock to a realistic market price”.

Spanish property prices should decrease

This means that prices “should” decrease, and Banks “should” assume losses in their balances as a result of real estate stock. Some experts’ point of view highlight that the Minister hidden message is to try to persuade home buyers and investors to buy a property in 2012.


Spanish financial reform

“The primary objective of the financial reform is to put the highest number of houses on the market and at the best prices.” The Economy Minister believes that the difficult protection requirements imposed on the banks will make access to the real estate market easier for citizens, prices will go down, and banks will grant mortgages more easily.
Banks have four months to set their property assets at market prices and cover their backs against “toxic assets” to 65% in the case of current projects (previously 27%) and to 35% in completed buildings and housing (previously 25%). What does this mean? This means that the more housing stock banks sell, the fewer capital resources they will need to reserve in order to cover or justify their property portfolios. Thus, banks will be keener to sell apartments at lower prices than expected.


“the reform will not help the Spanish property market”

Other experts also underline that in the current economic crisis the mentioned reform is not the dramatic change that the market needs in order to force Banks to drop prices of “no sub-prime” assets, on one hand, and to encourage the demand, on the other hand.
The Government’s reasoning is that the 50 billion euros in provisions that Banks must accumulate will lead them to improve their access to the wholesale market, which mean that they will obtain more liquidity at a better price, and this will revitalize their business, granting loans. Thus, “Banks will stop being real estate agencies and they’ll concentrate on their traditional business.”
This way, the Government assumes, Banks will allow more credit for more properties at better prices, given that “in the current situation,” De Guindos says, “Banks only offered credit for their own properties”.
According to the Government, this reform will entail 50 billion euros to cover a total of 323 billion euros in loans tied to the construction sector as of June 2011, of which 175 billion represents problematic assets. To understand this effort, between 2008 and 2011, it took approximately 66 billion euros to rectify the problem.
Aside from improving the protection against risky loans, Banks also need to assure themselves of a generic 7% cushion to cover the rest of the existing real estate risk. This must be measured against current results, which will mean 10 billion less in their accounts.
The government will also augment the Ordered Banking Restructuring Fund (Fondo de Reestructuración Ordenada Bancaria – FROB), from today’s 9 billion to 15 billion. This will require taxpayers to outlay four billion more out of pocket to bailout out the banking sector.
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