Some years ago, my parents bought a pretty little flat a few miles from the bustling beach town of Torrevieja which is located in the south of Spain somewhere between Alicante and Malaga. Although they intended to retire there to enjoy the sunshine, they have spent precious little time there over the years, demonstrating a clear and to my mind perverse preference for the London gloom.

Three years ago I went to pass a week of the summer holidays there. Far from being a typical Spanish town, the whole area had been anglicized. There were pubs with satellite television showing British football matches watched by what looked like typical British football supporters, fish and chip shops, British newspapers… Not a sign of jamón, paella or any native Spanish speakers for miles.

But the local services left a lot to be desired. The rubbish collectors had obviously been taking tips from their counterparts in Naples, the nearest bus service was miles away, there was no pharmacy… Clearly the local administration had been happy to grant planning permission for new and sometimes haphazard construction, probably garnering a healthy percentage of the inflows coming from home buyers moving into the area from abroad, but it had given precious little thought to the infrastructure that an entire community of foreign residents might need.

Nonetheless, the new residents were an undemanding lot—an English breakfast, the Sun and a couple of pints with their pub lunch, preferably while watching Man U against Chelsea, and they were happy. What’s more, in just a few short years they had seen the value of their homes skyrocket as a growing number British expatriates sought to find a little sun while moving into a community which spoke their own language. Because these were the boom years in Britain, and many people could not only afford foreign holidays now, they could actually afford foreign homes. Nor was it just only the Brits moving in to find the sun—I was told that many German and Scandinavian communities had also sprung up in recent years on what was once barren ground.

One day I decided to take a long walk into the countryside, and it was one of the most depressing walks I have ever taken. I did not find any countryside. My seven mile walk took me past endless housing complex developments at various stages of completion, in what probably once had been beautiful country. Where there were no buildings, the land had been bulldozed in preparation for construction. “This is insane,” I thought to myself.

And, of course, it couldn’t last.

And it didn’t. Now both the residents and the authorities in that area—along with those in many others that had been built up so rapidly in this part of Spain in order to profit from the housing price boom—is learning how oversupply of homes can force prices quickly back down. Many of the recently-completed properties are still on the market, and are being offered at vastly inferior prices compared to last year, even more so when compared to the year before. The British, Germans and Scandinavians who were buying these houses and flats are no longer doing so. The British in particular are beginning to realize that credit is getting expensive, that their debts are probably unsustainable as things stand, and that house prices do not rise indefinitely, at home or abroad. Some buyers, now finding the market value of their homes way below what they owe on their mortgage, have given up and decided to stay at home, in the rain.

And what of the mortgage lenders? According to Bank of Spain, not only have Spanish banks by and large avoided buying subprime and other mortgage-based securities from the United States, they have also maintained prudent lending standards at home, with loan to value ratios generally running at around 80% or less. Caja Madrid put its non-performing loan ratio at 0.90% of qualifying credit risk at the end of 2007, “confirming Spanish institutions’ relative strength versus international peers,” according to the bank’s annual report.

No subprime exposure in Spain, then, and no problems with home-originated mortgages? Yeah, right.

The effects of the property price collapse are yet to be accounted for. Who is holding the mortgages, and how much, under fair value accounting, have they lost. There have been few answers as yet. I for one believe that at least one or two Spanish bankers are walking around with a slice or two of jamón over their eyes.

This entry was posted on Thursday, July 17th, 2008 at 2:53 pm and is filed under Credit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.