Credit tremors rock Spanish housing boom

Spain’s Socialist government kept a gag on any discussion of the housing slump in the run-up to the general election on March 9, but now it has secured re-election, the trickle of bad news has become a flood.

Builders are going out of business because real estate developers – whose sales have slumped – cannot afford to pay them. The number of construction groups filing for protection from creditors shot up 87 per cent in the last quarter of 2007, compared with the same period in 2006, according to the national statistics institute.

Some of Spain’s biggest real estate groups, including Colonial, Fadesa and Habitat, have been locked in negotiations with creditors to stave off bankruptcy.

At the height of the 10-year construction boom, Spanish and international banks lent billions of euros to these companies to finance their expansion at home and abroad. In a downturn, real estate groups will be under pressure to write down the value of assets on their books. The Bank of Spain, the financial regulator, is also obliging banks to set aside more provisions against loans to builders and real estate developers.

The question now is how deeply the real estate slump will affect the wider economy.

Dominic Bryant, an economist with BNP Paribas, says Spain is more vulnerable to a housing crisis than other European countries because of the size of its construction sector. “Housing investment equals 9 per cent of [gross domestic product], more than double the average of some developed economies and much higher than the 6.3 per cent of GDP seen in the US before the collapse of housing investment,” Mr Bryant says. Investment in the rest of the construction sector accounts for another 9 per cent of GDP. Construction employs 13 per cent of the workforce.

At the same time, the international credit squeeze has dried up foreign funding for Spain’s spending spree, much of it on housing, and this has transformed a soft landing for the construction sector into a crash.

“A sharp slowdown is clearly under way in Spain,” Mr Bryant says. He estimates economic growth will slow to 2 per cent in 2008 and 1 per cent in 2009, from 3.8 per cent last year.

But if house prices start falling – as Asprima, the association of real estate developers, predicts they will – the contraction will be still sharper.

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“A sharp slowdown is clearly under way in Spain,” Mr Bryant says. He estimates economic growth will slow to 2 per cent in 2008 and 1 per cent in 2009, from 3.8 per cent last year.

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The question now is how deeply the real estate slump will affect the wider economy.

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