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ECONOMY

Spain and UK banks are most vulnerable to real estate risk

The Spanish and UK banking systems could be more exposed to risk when it comes to real estate investment, a new report by leading credit rating agency Fitch reveals.

spain uk banks real estate risks
The main weakness when it comes to Spanish banks is the number of variable mortgages in the country, according to Fitch. Photo: Biel Morro/Unsplash

Spain is one of the world’s most popular countries for foreign property buyers, particularly those from other European countries.

READ MORE: Foreigners are paying more than ever for property in Spain

But existing Spain homeowners, as well as those considering purchasing a home, should be aware of the economic risks and downsides. 

The Spanish and UK banking systems are the most vulnerable when it comes to real estate investment, according to a new report by Fitch Ratings, one of the world’s “big three” credit rating agencies.

This is largely due to the rise in interest rates and their higher borrower risks.

The recession in the UK and economic slowdown in Spain, plus the high rates of inflation across Europe and an increase in unemployment will mean that banks will come under increasing pressure in 2023, making it even more difficult to secure a mortgage.

ANALYSIS: Is Spain heading for a recession?

However, the report confirmed that the situation would not be as dire as during the financial crises of 2008.

Fitch ranked ten Western banking systems (UK, Spain, Australia, Canada, the Netherlands, Germany, France, the US, Italy and Denmark) that were vulnerable to real estate risk based on customers’ susceptibility to rising mortgage rates, real estate price risks and banking system vulnerability.

The UK came in at number one, being the most vulnerable, and Spain was number two. The UK scored the worst in the borrower risk category, while Spain scored worst in banking system vulnerability.

The countries with the lowest risk according to the study were Denmark in 10th position and Italy at number nine.  

Spain and the UK have the highest percentage of variable and fixed-rate mortgages that expire or reset within 24 months.

READ ALSO: How to change from a variable to a fixed mortgage in Spain

The main weakness when it comes to Spanish banks is the number of variable mortgages in the country, which can cause problems when interest rates are high. Even though Spain may start out in a better position than countries such as the Netherlands, Germany and Canada, those countries have more borrowers with fixed mortgages who will not be so affected by the rise in interest rates.

Spain and UK are also the countries out of the ten on the list where households have the least amount of savings, so are unable to pay for a significant increase in their mortgages.

Spain’s banking system is also vulnerable as a result of the country’s chronically high unemployment levels and the prospect of it rising whenever the economic situation worsens.

On a more positive note, Spain seems to have less real estate risk compared to some other countries such as the US, where the pandemic housing bubble is currently bursting.

This stems from the fact that housing prices are not expected to fall in Spain so much as in some other countries, where they are overvalued because they rose during the pandemic.

In Australia, Canada, Denmark, the US, the Netherlands and the UK, prices are already falling in 2022, the report points out.

The report also shows that Spain has some of the most comparatively expensive properties out of the 10 countries when you take into consideration the housing prices and the average household income.  

The average salary in Spain in 2022 is €24,009 per year, which works out to a gross income of €1,714.94 in 14 payments.

To conclude, the report states that Spain, along with all the other countries in the study, has better capabilities to deal with a crisis within the real estate sector now than it did in 2008.

Since then, credit requirements have tightened, and banks are subject to greater scrutiny by regulators.

But the report states that Spain is worse positioned than others to mitigate the effects of a real estate crisis, such as insurance where banks protect themselves from mortgage defaults.

READ ALSO: How Spain will help homeowners with rising variable mortgage rates

In contrast to this, Fitch also praised the special agreement that the Spanish government and the country’s banks made to introduce a set of measures to help protect more than one million low and mid-income families from rising variable mortgage rates.

This measure “could be used in other jurisdictions” it stated and will allow for “reducing total defaults at the cost of increasing the value losses of banks”. 

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PROPERTY

Why Spain is unlikely to ever ban foreigners from buying property

After several regions around Spain have attempted to bring in limits on property purchases by foreigners, members of Spain's government coalition have even started floating the idea of an outright ban at a national level.

Why Spain is unlikely to ever ban foreigners from buying property

In recent years several regions around Spain have attempted to put limits on foreigners buying homes and clamped down on tourist rentals. These are mainly in areas traditionally popular with foreigners, and many have become places with highly inflationary property markets.

In 2022 Canary nationalist political party Nueva Canarias demanded the regional government address the large number of property purchases by non-residents in the archipelago, and even suggested a limit on the number of properties that can be bought by foreigners altogether in the popular holiday islands.

READ ALSO: Will Spain’s Canary Islands limit sale of properties to foreigners?

Property prices have surged across Spain in recent years, sparked in part by an influx of post-pandemic purchases by foreigners, as well as tourist accommodation geared towards wealthy remote workers and digital nomads pushing up rental prices and pricing out locals. Increasingly, landlords will buy properties with the aim of converting them into Airbnbs, thus removing them from the pool of available (and affordable) housing stock for locals.

This comes after Spain’s other archipelago, the Balearic Islands, also started this same debate in November 2022, with the regional Senate agreeing to discuss solutions.

In the two decades from 2000-2020, the islands’ population grew by 50 percent – rising from 823,000 to 1,223,000 inhabitants. Around a third (32.67 percent) of property purchases in the Balearics are made by foreigners, and of those 57.4 percent are residents, while the remaining 42.6 percent are non-residents.

National ban?

But it’s not just a regional issue. In 2024, the debate rumbles on in parts of Spain particularly affected by foreign home owners and members of the Spanish government are even proposing similar measures at a national level. Though, it should be said, no policy has been decided on yet, and any move such as a ban (in whatever form, on whatever type of property) or even a limit would likely face fierce opposition from the main opposition parties, notably the centre-right Partido Popular (PP).

Sumar, the far-left junior coalition partner in the Spanish government, has even gone as far as proposing a three year ban on the purchase of housing by investment funds and non-residents in Spain.

This was recently outlined in a (for now) non-legislative proposal that was presented to the Spanish Congress’ Housing Commission. It was roundly rejected with the vote of, among others, its coalition partner in government, the Socialists (PSOE). That’s not to say the PSOE is totally against the idea, however.

Socialist Minister for Housing Isabel María Pérez said of the plans: “We agree on the philosophy of the proposal, but with nuances,” she said. “We have submitted an amendment but we think it will not be accepted, so we will not be able to support this bill,” she added.

So, from that we can take that the junior partner in the Spanish government wants to ban non-residents and investment funds from buying property in Spain, and the senior partner (Prime Minister Pedro Sánchez’s party, no less) supports the principle but not the practicalities.

READ ALSO: Spain’s new housing minister vows to protect second homeowners

The argument against

Clearly, non-resident foreigners buying up property in Spain, particularly in its space starved archipelagos, contributes to price inflation, saturates the market, and plays a role in pricing locals out of their own neighbourhoods.

However, it’s not that simple. Clearly, there is a difference between a non-resident foreigner buying a holiday home (perhaps to rent out as tourist accommodation for half the year) and a resident foreigner buying property to live in.

READ ALSO: How important are foreign second homeowners to Spain?

This difference has, for now, been reflected in proposed limits at both the regional and national level, rather than outright bans.

However, foreign home owners in Spain also make a huge contribution to the Spanish economy. In 2022 foreigners with a second home in Spain contributed €6.35 billion to Spanish GDP and generated more than 105,000 jobs in the tourism sector, according to the study “The economic impact of residential tourism in Spain” done for the Spanish Association of Developers and Builders (APCE) by PricewaterhouseCoopers (PwC).

The financial contribution made by these second-home owners in Spain is clearly significant. In fact, experts point out that the money brought into the Spanish coffers by foreign homeowners even outstrips some major industries.

“The contribution of residential tourism to GDP is triple that of the textile industry, double that of the timber industry and the same as the manufacture of pharmaceutical products in Spain,” Anna Merino, director of the Economics team at PwC, said when presenting the study. Every euro spent by ‘residential tourists’ adds €2.34 to Spanish GDP. On top of this direct contribution to the Spanish economy, the surrounding economic activity associated with the spending generated 105,600 full-time jobs in 2022.

So, there’s clearly an economic argument against banning foreign property purchases completely.

In the case of the Balearic Islands specifically, the proposals have met some opposition. The Balearics, which generates 35 percent of its GDP from tourism, according to figures from Caixa Bank, has long been a holiday or second-home hub for wealthy foreigners.

On this point, right-wing Popular Party member Sebastià Sagreras suggested in the regional parliament back in 2022 that conflating the foreign-buyer property market with local shortages is unhelpful, adding that the properties bought by foreigners, often worth more than a million euros, “do not compete” with those that cost €200,000 or €250,000 and are largely bought or rented by national residents.

Is it even legally possible?

Denmark, Malta and the Aland Islands in Finland all have restrictions on how non-resident foreigners can buy properties in their territories. However, they introduced these before entering the EU and these limits were factored in and accepted by Brussels. For Spain to do this, it would be much more difficult.

For local authorities in both the Balearic and the Canary Islands it could prove difficult to go against the EU’s legal principles of the free movement of people and capital, experts say.

This means that other potential solutions may be needed. Though there doesn’t seem to be a national level ban on foreigners from buying properties in Spain anytime soon, several regions have been attempting to do it for a couple of years, at least for non-residents, and even the national government is beginning to try and do something about it.

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