Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2) By Sharon Smyth and Ricard Alonso http://www.bloomberg.com/apps/news?pid=20601109&sid=ar3L878k5YM4&refer=home June 6 (Bloomberg) -- Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see. ``We came to look at apartments but found ghost towns,'' said Usua, a 27-year-old taxi driver. ``You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe so we turned around and left.'' The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the Housing Ministry started keeping records. Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry. ``The real killer of the housing market is the immense oversupply,'' said Gonzalo Bernardos, a professor of economics at the University of Barcelona. ``Prices are already unofficially falling.'' New and existing house prices will drop by 20 percent from now through 2009, Bernardos estimates. The country built an average of 432,411 houses per year from 1996 to 2005, more than France and the U.K. combined. Spanish home prices have more than doubled since 1998, exceeding growth rates in the U.K. and Ireland, two of Europe's fastest-growing markets. The increase has been driven by a drop in interest rates to less than 3 percent from about 15 percent as Spain adopted the euro, household incomes that swelled as women joined the workforce, and a surge in vacation home purchases by Northern Europeans, mainly Germans and Britons. `Appraisals Are Poetry' As prices start to decline, Spanish homeowners may face the same challenges as buyers in the U.S., which is in the second year of a housing slump. Falling prices may spur higher delinquencies as buyers face difficulty refinancing. Spanish buyers may face an even higher risk of losing their property because housing prices are based on appraisals rather than actual sales, and appraisers often inflate values. ``We live in a country where everybody understands that appraisals are poetry,'' said Jesus Encinar, chief executive officer and founder of Idealista.com, a property Web site that tracks existing home prices in Madrid, Barcelona and Valencia. ``Bankers have said to me, `Why do you care if the appraisal is fake? It will be true in the future.''' The average house price in Spain was 276,300 euros ($370,670) in December, according to Sociedad de Tasacion, a property company. That's up 107 percent since the same period of 2000. Madrid Leads Existing home prices in Madrid, now stagnant, may start to fall by 0.2 percent in the first quarter of next year, Encinar said. Madrid tends to lead the rest of the country, so prices throughout Spain probably will begin to drop by the end of 2008, he said. Banks loaned 250 billion euros to developers last year, eight times more than in 1998, and 134.3 billion euros to construction companies, data compiled by the Bank of Spain show. They loaned 544 billion euros to homebuyers, four times the value of mortgages in 1998. Bilbao Bizkaia Kutxa has introduced 50-year mortgages and Banco Bilbao Vizcaya Argentaria SA has started making 40-year mortgages. Bilbao Bizkaia also offers loans up to 100 percent of the appraised value. That means even a modest decline in home values, combined with rising interest rates, may result in higher foreclosures. ``The problem here is that people have this unshakeable conviction that prices simply cannot fall,'' Encinar said. The amount of Spanish families' wealth tied up in property in 2004 amounted to 4.3 trillion euros, or 510 percent of gross domestic product, according to the Bank of Spain. U.S. households held $17.2 trillion of real estate, or 159 percent of GDP, in the same period, according to the Federal Reserve. Rising Defaults Defaults on Spanish home loans in the first quarter were the highest in at least four years, according to Standard & Poor's. The S&P Spanish RMBS delinquency index for loans backing residential mortgage-backed notes increased by 23 basis points to 1.75 percent during the first three months, S&P analysts wrote in a report on May 29. That compares with an index level of 0.7 percent in March 2004. ``Banks have lent a tremendous amount to developers who used the money to buy land and now they have no choice but to build houses on it to recoup their money to repay their own loans,'' said Pablo Gaya, head of analysis at Capital at Work Investment Partners in Madrid. ``Any sharp downturn in the housing market would make it even harder for developers to sell and may lead to defaults on loans, which would cause a headache for banks.'' Rate increases have a more direct immediate effect on Spanish families because 96 percent of mortgages in Spain are variable rate, compared with about 20 percent in the U.K. and 12 percent in the U.S. Economic Concerns The Organization for Economic Cooperation and Development said in a Jan. 23 report that Spain's decade-long real estate bonanza boosted household debt as a percentage of disposable income to 115 percent in the second quarter of 2006 from 45 percent in 1996, making the Spanish market among the most vulnerable to higher interest rates. Concerns about Spain's real estate market and economy are keeping Usua and Graneda from buying right now. The couple now lives in a two-bedroom apartment in the central Madrid neighborhood of La Prosperidad that belongs to Usua's father and uncles. They were hoping to purchase an apartment in Sanchinarro or Las Tablas to have their own place. The plethora of ``for sale'' signs and construction in both areas also is scaring them off, Usua said. `Flood of Speculators' ``When rates rise and people who are already up to their eyebrows in debt find they can't pay their mortgages, the last thing they are going to do is take a taxi, or eat out, and that affects you, me and everyone,'' Usua said. The apartments they were looking at cost from 300,000 euros to 400,000 euros. Just as developers profited from first-time buyers, they also have benefited from investors who bought property in anticipation prices would rise.