Rise in mortgage defaults in Spain in 2009

Defaulting on mortgage repayments in Spain in 2009 soars to 4%

According to forecasts made by the Spanish Mortgage Association (AHE) defaulting on mortgage repayments is expected to remain at record levels and will close at 4% at the end of 2009 compared to just 2.36% for 2008 due mostly to the rise in unemployment. According to the association ‘the rise in unemployment since the beginning of 2008 will become the principal factor for the rise in the rate of households getting into debt’.

In fact the prediction of 4%, which is half the figure which is expected for overall indebtedness believes that the rate of defaulting on mortgage repayments will slowdown compared to the first quarter of 2009 given that it has already tripled since last year when it stood at just 0.991% for the same period.

Furthermore the association also points out that section of society that is vulnerable to the risk of unemployment is less than that which is at risk from interest rate rises.

The rate of defaulting amongst the private residential sector was registered to be 4,52% last April which is four times the level registered in April 2007 and contrasts with 1.37% registered in April 2008. Experts have also pointed out that mortgages are the last thing that Spaniards stop paying.

With a view to the future the AHE predicts that in 2009 and 2010 defaulting on mortgage repayments due to interest rate rises will gradually decrease given the current low rate of the Euribor (1%).

On the other hand, defaulting on credit used to finance activities related to the property sector stood at 7.58% in March this year which is more than seven times above the rate recorded in March 2008 (0.89%). In addition, defaulting on credit repayments in the construction sector stood at 6.76% in March this year compared to 1.22% for the same month in 2008.

Source: El País

Capital gains tax on property sales in Spain

Spanish regional authorities ignore slump in property sales and continue to increase capital gains tax

With the slump in property sales and the inevitable fall in prices property sellers in Spain are now facing a new problem: the fact that Spanish regional authorities continue to value property at a higher price means that the seller is faced with the problem of having to pay higher capital gains tax on the sale of the property than they should.

In Spain property sellers are bound by law to pay 7% of the price of the sale of their property to the regional government where they live. However, with the significant fall in property sales buyers are able to negotiate better prices and property sellers are more likely to drop their prices in order to obtain a sale. Nevertheless, regional authorities throughout Spain often place the value of property at a higher level. In effect this means that a seller might be forced to pay taxes on a higher amount than they have actually received for the sale of a property.

Each regional authority has their own mechanisms to make sure that fraud does not occur and that people do not declare the sale of their properties at a lower amount than they have actually sold at and during the property boom this system seemed to work well. However, with current slump in the property market regional authorities do not appear to be keen on adjusting their calculations especially since they have seen their own budgets shrinking substantially.

Furthermore the problem of being overcharged for the sale of a property is more serious for those sellers who are willing to drop their prices even further in order to sell their property. This in reality means that those sellers who have adapted to the current economic climate face the sanction of being overcharged for capital gains tax.

According to some notaries this situation is ‘profoundly unjust and even unconstitutional because it violates the principle of proportion in charging taxes’.

Furthermore the situation is likely to get worse as property prices fall even further with regional authorities unwilling to adjust their valuations.

Each regional authority has its own way of calculating the value of a property and that while property sellers can ask for an independent valuation in order to pay the correct amount of tax on the sale of their property this also incurs risks because it could result in them being charged for the valuation.

Related: Property taxes in Spain

Surplus housing in Spain rises

Construction companies will add 385,000 houses to surplus housing stock

The surplus housing stock which construction companies have accumulated and for which they are finding it difficult to off load is now the number one problem for those in the housing sector. An internal report compiled by the Ministry for Housing and released by El Pais today has for the first time not only issued a figure for the number of surplus housing stock (houses and flats already on the market) but also those that are currently in the process of being built. The figure is almost one million – more precisely 997,562. Some experts believe that a number of newly built houses and flats will never be sold.

The report holds a great deal of information on the immediate past and the future for the housing sector. At a time when demand is being stifled by the difficulties in obtaining credit, the increase in unemployment and the expectation that property prices will drop even further the market has in effect found itself in a state of paralysis. This paralysis has led to the number of newly built properties coming onto the market rising rapidly. At the end of 2007 the surplus housing stock numbered little more than 400,000. However, by the end of 2008 it grew to 613,512 units. That is an increase of 51% in just 12 months. To exacerbate the problem even further almost half of the surplus stock of new housing is located along the Spanish Mediterranean coastline.

It is clear that construction companies will find it difficult to get rid of houses and flats which during the boom years were sold at planning stage. Government initiatives such as those to convert privately built flats into state subsidised housing are not working. However, if construction companies think they have problems now worse is yet to come because many of the houses and flats under construction in 2008 are now arriving at their completion stage which means that they will soon come onto the market. Out of 626,000 properties being built just 243,000 have been sold.

This is where the figure of a million comes from – adding the 613,000 properties already on the market to the 385,000 under construction which have not been sold yet. The pessimistic outlook for the housing market means that many houses and flats under construction will never be completed. But it is hoped that those in their final stages of construction will be completed.