Fitch Ratings comments today that Spanish house prices will likely continue to decline over the near-term and remain under pressure, at least until 2012. From the peak in 2008, Spanish home prices have declined 11,2% – according to the Fitch analysts the slide is moving towards 30%.
“Fitch estimates that there are over one million units of housing stock available for sale throughout Spain.”
Fitch maintains its forecast of a 30% decline in Spanish residential property values, on average, from the peak recorded in 2008. The agency therefore expects that declining home prices will negatively affect existing Spanish RMBS transactions due to lower recoveries on defaulted loans over the near-term.
“Fitch believes that Spanish house prices remain over-valued relative to income thresholds and need to decline further to improve affordability dynamics,” says Rui Pereira, Managing Director and Head of Fitch’s Spanish Structure Finance in Madrid.
“The supply overhang of unsold homes, more pro-active sales strategies by financial institutions, and reduced credit availability are also expected to weigh on Spanish home prices over the near-term.”
Spanish house prices have gone through a nominal adjustment that statistics from the Ministry of Housing place on a national average of 11.2% for the period Q1 2008 to Q1 2010.
However, Fitch believes this aggregate data does not appropriately reflect current market conditions as the market has become increasingly illiquid.
Compared to their peak in mid-2006, home sales had declined 48% at the end of 2009 on a quarterly basis.
Market illiquidity is weighing on home prices and individuals forced to sell in the current environment are incurring significantly higher price declines than those suggested by the government index.
Fitch’s home price projection, which was included as a baseline scenario in the agency’s RMBS criteria addendum for Spain published on 23 February 2010, was developed based on the evolution of affordability measures in Spain, the house price long term equilibrium and the imbalances of demand and supply.
(For further information, please see the 23 February 2010 criteria addendum, entitled ‘EMEA Residential Mortgages Loss Criteria Addendum-Spain’, which is available at www.fitchratings.com.)
Spanish borrower affordability suffered significantly during the boom, with the number of years of gross household income necessary to acquire a property growing to 7.7 at the peak of the market from around 3.9 years in 1995-2000.
While there are unique factors in Spain to support a higher income multiple relative to other jurisdictions, including a high home ownership rate at approximately 80%, affordability measures look stretched in absolute and relative terms.
Affordability should be in the range of 5 years of gross household income in order to be sustainable, which would result in a 30% price correction from the 2008 market peak.
Despite a sharp contraction in housing starts, there is a significant oversupply of properties, which will take considerable time to clear. Fitch estimates that there are over one million units of housing stock available for sale throughout Spain.
This overhang results from years of overbuilding, particularly in coastal areas and city suburbs, and banking system housing inventory growth.
Fitch believes there will be significant variations around its average house price decline expectation, reflecting regional housing and economic differentials.
Markets along the Mediterranean coast, with a heavy second home component, are likely to experience the sharpest adjustments.
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