Negative equity in Spain

Transcription

1 Negative equity in Spain A forecast of mortgage holders in negative equity by autonomous community December 2013 Centre for Economics and Business Research Ltd

2 Executive Summary Negative equity in Spain December 2013 Slow, cautious recovery in Spanish economy as euro area financial system remains weak and fiscal tightening is ongoing. Spanish economy expected to grow by only 0.2% in 2014 Credit conditions in mortgage market are stabilising but demand for houses is still very weak with a net balance of 22% of banks reporting declining demand for loans Mortgage lending continues to slide with the number of approvals in 2012 around 20% of 2006 peak levels Housing construction is expected to fall further between 2013 and 2015 by 42% After falling year-on-year by 10.6% in Q4 2013, Spanish house prices are forecast to fall by 8.5% in Q and 8.0% in Q In Q4 2013, there is expected to be a jump in number of mortgages in negative equity to 581,000 compared to 359,000 the previous year

3 Executive Summary Negative equity in Spain December 2013 The number of mortgages in negative equity is forecast to rise to 710,000 by Q The average LTV (Loan-to-value) ratio per mortgage in negative equity is forecast to rise from 113% in Q to 121% by Q The total value of negative equity is expected to be 13bn in Q and forecast to increase to 20bn by Q At the regional level, Cataluña and Comunidad de Madrid have seen the largest falls in house prices from peak levels. These regions account for 43% of all mortgages in negative equity in Q LTV ratios amongst those in negative equity are forecast to be highest in Cataluña, La Rioja and Comunidad de Madrid with ratios of 132%, 130% and 127% respectively by Q4 2015

4 Overview Negative equity in Spain Section one National results In this section, we firstly provide an overview of economic and financial conditions in Spain. We then analyse key features of the housing market such as mortgage lending, housing supply and house prices. Current and forecast levels of negative equity and its depth (defined as the difference between the value of the outstanding loan and the market price of the house) are set out to The data in this analysis are provided by Instituto Nacional de Estadística (INE) and Banco de España. Section two Regional results The analysis of the level and depth of negative equity is broken down for each of the 19 autonomous communities. The analysis is underpinned by regional forecasts for house prices based on current trends in house price growth, local employment and national/regional trends in housing construction. Regional data on mortgage lending are drawn upon to establish the pool of mortgage holders in each autonomous community who are at risk of falling into negative equity. Section three Methodological appendix In this section, we set out the methods used to arrive at the data used in the report, while also providing a comprehensive list of sources used in the analysis. December 2013 This report summarises the findings of a study into the number of mortgage holders forecast to fall into negative equity in Spain between Q and Q A mortgage holder is defined as in negative equity when the value of their outstanding loan is greater than the value of the house upon which the loan is secured. The report is set out as follows:-

5 Section one - National results Centre for Economics and Business Research ltd

6 Slow, cautious export-led economic recovery in 2014 against weak financial and fiscal conditions A strained financial system in the euro area and high levels of debt are expected to inhibit growth over the medium term as uncertainty stifles investment. Economic conditions are expected to improve modestly in 2014 as business confidence stabilises and the pace of fiscal tightening eases. Exports (in particular of agriculture and tourism) are expected to provide a boost over the forecast period GDP growth of 0.2% and 0.4% is anticipated in 2014 and 2015 respectively. The labour market is expected to remain depressed for years to come, with job levels falling by 2.6% in 2014 and % 4% 2% 0% -2% -4% -6% -8% Negative equity in Spain December 2013 Spain GDP and employment, annual change Annual Change in Employment Annual Change in GDP Source: Eurostat, Instituto Nacional de Estadisticas(INE), Cebr analysis

7 Negative equity in Spain December 2013 Bank lending criteria for house purchases remain extremely restrictive, but conditions are stabilising Credit conditions across the Euro area are beginning to stabilise with the pace of tightening slightly easing. A weak business outlook and macroeconomic uncertainty are still major risk factors for banks. In Spain, lending standards for house purchases have continued to tighten in recent quarters, but by marginally less than the rest of the Euro area. This is partly explained by more severe tightening of credit standards since the onset of the housing bubble s bursting. The latest data shows no change in banks credit standards in Q We expect lending criteria for house purchases to remain relatively stable over the next two years. Changes in banks credit standards for approving loans to households in past three months, net balance (-ve indicates tightening of standards) Q Q Q Q3 Q1 Q Euro area Q Q Q Q3 Q Spain Q Q Q Source: European Central Bank, Banco de Espana, Cebr anlaysis

8 Demand for house purchases is still very weak Negative equity in Spain December 2013 Demand for loans for house purchases continues to decline in Spain, despite a return to positive growth in loan demand across the Euro area. A net balance of 22% of banks reported declining demand for loans in Spain in Q3 2013, compared to a net balance of 5% of banks reporting increases in the rest of the Euro area. Weak consumer confidence and the poor outlook for the housing market are the chief reasons for decreasing demand. As the economy returns to growth and the housing market shows signs of stability, we expect demand to steady. Changes in demand for loans for house purchases in past three months, net balance (+ve indicates increasing demand) Q Q Q Q Q Q Q Euro area Spain Source: European Central Bank, Banco de Espana, Cebr anlaysis

9 Mortgage volumes continue to collapse Negative equity in Spain December 2013 Mortgage lending continues to slide, as tight credit conditions and declining demand take their toll. A total of 273,873 mortgages were approved for new house purchases in This is around 20% of the peak level in 2006, when 1,342,171 were approved. The percentage of mortgages being granted with a loan-to-value (LTV) ratio above 80% has increased from its trough of 11% in 2009 to 16% in However, these figures are based on a smaller pool of approved mortgages, and still remain lower than the 2006 peak of 17%. Mortgages for new house purchases (left axis) and the percentage of mortgages approved with a loan-to-value (LTV) ratio greater than 80% (right axis) 1,600,000 1,400,000 1,200,000 1,000, , , , , Mortgage approvals for new house purchases (left axis) Percentage of mortgages with LTV>80% (right axis) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: Banco de Espana, INE, Cebr analysis

10 Housing supply to bottom out by the end of 2015 Negative equity in Spain December 2013 New houses completed After a prolonged and dramatic period of contraction, the oncebooming construction sector is expected to stop shrinking by the end of A total of 67,960 homes are expected to be completed in This is only around 10% of the number of housing completions in New housing supply is forecast to fall by 42% between 2013 and There is little to be positive about regarding the outlook for the Spanish construction industry. Thousands Source: INE, Cebr analysis

11 House prices expected to fall by 8.5% in Q and 8.0% in Q The average Spanish house price in Q is estimated to be 151,000. This is some 37% below the Q peak level. Enduring weak labour market conditions, coupled with an indebted and deleveraging household sector, are expected to lead to further declines in house prices. We expect house prices to decrease year-on-year by 10.6% in Q and experience further falls of 8.5% and 8.0% in Q and Q respectively. By Q4 2015, the average price of a home is forecast to be just 127, % 5% 0% -5% -10% -15% Q Q Q Q Negative equity in Spain December 2013 Year-on-year change in Spanish house prices Q Q Q Q Q Q Source: INE, Cebr analysis

12 Spike in negative equity volumes to 581,000 households, rising to 710,000 by 2015 We expect a large spike in the number of mortgage holders in negative equity in Q compared to the same period last year. A total of 581,000 Spanish mortgage holders are estimated to be in negative equity in Q As house prices continue to drop, we expect this figure to rise by 88,000 to 669,000 at the end of By the end of 2015, a total of 710,000 Spanish mortgage holders are forecast to be in negative equity. Of those mortgage holders who took out loans between Q and Q4 2012, we expect the proportion in negative equity to rise from 8.8% in Q to 10.7% by the end of , , , , , , , ,000 0 Negative equity in Spain December 2013 Number of mortgages holders in negative equity Q Q Q Q Q Q Q Source: Banco de Espana, INE, Cebr analysis

13 Negative equity in Spain December 2013 Average LTV ratio to approach 121% for those in negative equity The average LTV for a Spanish mortgage holder in negative equity by the end of 2013 is expected to be 113%. As the average house price in this period is 151,000, this suggests that the average Spanish mortgage holder who is in negative equity is estimated to be so to the tune of 20,000. We predict that further house price falls will see the LTV ratio rise to 121% by the end of Depth of negative equity, LTV ratio for mortgages in negative equity 125% 120% 115% 110% 105% 100% Q Q Q Q Q Q Q Source: Banco de Espana, Instituto Nacional de Estadisticas, Cebr analysis,

14 Total value of negative equity to increase by 60% between 2013 and 2015 We estimate that the total value of negative equity in Spain to be 13bn in Q In value terms, the period between Q and Q is where the sharpest rise in negative equity has been seen. We estimate the total value of negative equity will continue to rise through to 2015, as house prices continue to fall, albeit at a slower pace. The value of negative equity is forecast to reach 20bn by Q Negative equity in Spain December 2013 Depth of negative equity, billions of euros - Q Q Q Q Q Q Q Source: Bancode Espana, Instituto Nacionalde Estadisticas,Cebr analysis,

15 Section two Regional results Centre for Economics and Business Research ltd

16 Cataluña and Comunidad de Madrid have seen the largest falls in house prices from peak levels In most regions, the peak house price level was reached during midto-late 2007 or early The autonomous communities of Cataluña and Comunidad de Madrid have seen the largest falls from their peak to current levels. House prices in these communities have fallen by 49% and 46%, respectively. Lower income per capita regions such as Extremadura and Andalucía and have seen the smallest falls in house prices from peak levels. In these communities, house prices have fallen by 29% and 30%, respectively, from peak levels to Q % -10% -20% -30% -40% -50% -60% Negative equity in Spain December 2013 Percentage change in house price from peak level to current level (Q4 2013) Cataluña Comunidad de Madrid Aragón La Rioja Navarra País Vasco Cantabria Nacional Comunidad Valenciana Castilla y León Illes Balears Castilla-La Mancha Ceuta (Ciudad Autónoma) Melilla (Ciudad Autónoma) Principado de Asturias Islas Canarias Región de Murcia Galicia Andalucía Extremadura Source: INE, Cebr analysis

17 Negative equity in Spain December 2013 But many coastal provinces are also seeing large falls in house prices Percentage change in house price from peak level to current level (Q2 2013), by province Coastal provinces 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% Source: Ministerio de Fomento, Cebr analysis Ceuta y Melilla Gipuzkoa Araba/Alava La Rioja Córdoba Bizkaia Palencia Principado de Asturias Córdoba Salamanca Badajoz Navarra Cantabria Coruña (A) Huesca Albacete Granada Jaén Sevilla Ciudad Real Cuenca Zamora León Valladolid Illes Balears Huelva Burgos Santa Cruz de Tenerife Pontevedra Nacional Cádiz Región de Murcia Lleida Barcelona Girona Almería Ávila Tarragona Alicante/Alacant Valencia/València Comunidad de Madrid Palmas (Las) Guadalajara Zaragoza Toledo Castellón/Castelló Málaga * Data above may not cohere with the analysis by autonomous community, as two different data sources were used. House price data at the national and autonomous community level was sourced from Instituto Nacionalde Estadisticas(INE), whilst provincial data is only available from the Ministeriode Fomento. The Prospects Service Centre for economics and business research, 2013

18 Cataluña and Comunidad de Madrid have 44% of Spanish mortgages in negative equity in Q Of the 581,000 mortgages in negative equity in Q4 2013, 42% (247,000) are located in either Cataluña (24%) or Comunidad de Madrid (18%). The next largest regions in terms of mortgage holders in negative equity are Comunidad Valenciana and Andalucía which have 67,000 and 66,000 mortgage holders in negative equity respectively. Thousands Total mortgage holders in negative equity by region in Q4 2013, thousands Negative equity in Spain December 2013 Cataluña Comunidad de Madrid Comunidad Valenciana Andalucía Castilla y León País Vasco Castilla-La Mancha Aragón Islas Canarias Región de Murcia Galicia Illes Balears Cantabria Principado de Asturias Navarra La Rioja Extremadura Melilla (Ciudad Autónoma) Ceuta (Ciudad Autónoma) Source: Banco de Espana, Instituto Nacional de Estadisticas, Cebr analysis

19 Cataluña, Comunidad de Madrid and La Rioja have highest rates of negative equity in their own regions To account for the difference in size between each region s mortgage market, we have also analysed the proportion of total mortgages approved between Q and Q which have fallen into negative equity. Our findings show that Cataluña and Comunidad de Madrid still have the highest rates of negative equity, with around 13% of mortgages approved between Q and Q falling into this category. Andalucía and Extremadura have the lowest rates of negative equity, with 4-5% of mortgages approved between Q and Q falling into negative equity. Proportion of mortgages in each region which are in negative equity in Q4 2013* 14% 12% 10% 8% 6% 4% 2% 0% Negative equity in Spain December 2013 Cataluña Comunidad de Madrid La Rioja Aragón Navarra País Vasco Cantabria Nacional Castilla y León Castilla-La Mancha Comunidad Valenciana Illes Balears Principado de Asturias Región de Murcia Galicia Islas Canarias Ceuta (Ciudad Autónoma) Melilla (Ciudad Autónoma) Andalucía Extremadura Source: Bancode Espana, Instituto Nacionalde Estadisticas, Cebr analysis *Based on the pool of mortgages taken out between Q and Q4 2012

20 Forecasting regional house prices out to 2015 Negative equity in Spain December 2013 Cebr developed a regional house price forecasting model based on statistical relationships between house prices, employment and housing supply for each of the 19 autonomous communities. Regional house prices average house price data by autonomous community from Q to Q was sourced from the Instituto Nacional de Estadisticas (INE) Regional employment the total number of persons employed by autonomous community was sourced from Q to Q from the INE. Housing supply regional INE data on new constructions is available on an annual basis but the data is only available from 2007 to We have therefore supplemented this with national housing supply data up to Q from the INE. The regional forecast is then constrained to be consistent with the national house price forecast which is based on the outlook for GDP, employment, mortgage lending and housing supply. The forecast regional house prices are a key determinant of future levels of negative equity in each autonomous community.

21 Negative equity in Spain December 2013 Employment prospects in regions supported by agricultural exports and tourism are expected to be better 8% Change in numbers employed by autonomous community 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% Change, Q to Q Change, Q to Q Source: Instituto Nacional de Estadisticas(INE), Cebr analysis

22 Negative equity in Spain December 2013 Eastern regions of Spain have seen largest falls in housing supply The scale of contraction in housing construction provides an indication of how much further house prices may have to decline to address the oversupply of houses on the market. On a regional basis, the eastern regions of Spain have seen the largest collapse in housing supply. The latest data for 2011 show that supply is 9-13% of 2007 levels. Región de Murcia has experienced the largest supply collapse, with annual housing construction around 9% of 2007 peak levels. Pais Vasco and Extremadura regions have seen less than average falls in supply. 35% 30% 25% 20% 15% 10% 5% 0% 2011 housing construction as a proportion of 2007 housing construction by region País Vasco Extremadura Aragón Navarra Comunidad de Madrid Galicia Principado de Asturias Illes Balears Cantabria Castilla y León La Rioja Andalucía Nacional Castilla-La Mancha Comunidad Valenciana Islas Canarias Cataluña Región de Murcia Source: InstitutoNacionalde Estadisticas, Cebr analysis,

23 Mixed picture for house prices across Spain Negative equity in Spain December 2013 At a national level, prices are expected to fall by 16% between Q and Q Region de Murcia, Castilla-La Mancha and Extremadura are forecast to see the largest drops in house prices of around 19% between Q and Q Islas Baleares, Canarias and País Vasco are expected to see the slowest declines in prices, of around 11%-13% over the same period. 0% -5% -10% -15% -20% -25% House price growth between Q and Q4 2015, percentage change Murcia (Región de) Castilla-La Mancha Extremadura Castilla y León Rioja (La) Aragón Cataluña Madrid (Comunidad de) Galicia Asturias (Principado de) Melilla National Cantabria Navarra (Comunidad Foral de) Comunidad Valenciana Andalucía País Vasco Canarias Balears (Illes) Ceuta Source: Cebr analysis, Banco de Espana, Instituto Nacional de Estadisticas

24 Cataluña, La Rioja and Comunidad de Madrid to see largest LTV ratios by 2015 At the national level, the average LTV ratio of a Spanish mortgage holder in negative equity is expected to rise from 113% to 121% between Q and Q The largest forecast LTVs are expected to be in Cataluña (132%), La Rioja (130%) and Comunidad de Madrid (127%). The sharpest rise in average LTV is expected to occur in La Rioja and Castilla-La Mancha, where LTV ratios are forecast to increase by 11 percentage points between Q and Q % 130% 125% 120% 115% 110% 105% 100% Negative equity in Spain December 2013 Average LTV ratio of those in negative equity by autonomous community, Q and Q Cataluña La Rioja Comunidad de Madrid Aragón Cantabria National Navarra Castilla y León País Vasco Castilla-La Mancha Región de Murcia Comunidad Valenciana Galicia Principado de Asturias Extremadura Melilla (Ciudad Autónoma) Illes Balears Islas Canarias Andalucía Ceuta (Ciudad Autónoma) Q Q Source: Bancode Espana, Instituto Nacionalde Estadisticas, Cebr analysis

25 Negative equity in Spain December 2013 Andalucía, Comunidad Valenciana and Cataluña to see largest absolute increases in negative equity by 2015 At the national level, we forecast an increase of 129,000 mortgage holders falling into negative equity between Q and Q Andalucía and Comunidad Valenciana are the regions expected to see the largest absolute increases in mortgage holders in negative equity between Q and Q The number of mortgage holders expected to fall into negative equity is forecast to rise by 25,000 and 19,000 in these regions respectively. Thousands Increase in mortgage holders in negative equity between Q and Q4 2015, thousands Andalucía Comunidad Valenciana Cataluña Comunidad de Madrid Castilla-La Mancha Castilla y León Región de Murcia Galicia Extremadura Islas Canarias Principado de Asturias Aragón País Vasco Illes Balears Cantabria Navarra La Rioja Melilla (Ciudad Autónoma) Ceuta (Ciudad Autónoma) Source: Banco de Espana, Instituto Nacional de Estadisticas, Cebr analysis

26 Section three Methodological appendix Centre for Economics and Business Research ltd

27 Methodology and main assumptions Negative equity in Spain December 2013 The methodology to estimate current and future levels of negative equity used a three-stage approach: 1. Estimating current levels of negative equity the study covers mortgages approved with an LTV (Loanto-value) ratio of greater than 80%. For this group, the average initial LTV upon point of approval was assumed to be 85%. The value of the loan outstanding in a particular period was calculated based on the value of monthly mortgage payments given the remaining term of the mortgage and the variable mortgage rate. The value of the house price in a particular period is determined by the official house price data by region from the INE. The modelling framework is illustrated in Figure 1 of the methodological appendix. Where the value of the loan outstanding exceeds the house price, the LTV of the mortgage holder is greater than 100% and therefore in negative equity (see Figure 2). 2. Forecasting regional house prices to forecast the equity of a household, it is necessary to have a prediction for house prices. This was achieved through first estimating house prices at a national level based on relationships between GDP, employment, mortgage lending, housing supply and house prices. To forecast regional prices, a statistical relationship between historic house prices, local employment and national/regional house prices was established. The resultant regional forecast was then constrained against the national picture to ensure consistency. 3. Estimating future levels of negative equity the forecast values for house prices in each region were used to calculate how the LTVs of those households which took out a mortgage between Q and Q would change in 2014 and 2015.

28 Negative equity in Spain Figure 1: Modelling framework for negative equity calculations December 2013 National /regional housing supply trends Source: INE Initial LTV ratio Mortgage term in years Source: Bancode Espana Variable mortgage interest rate Source: ECB Mortgages with LTV>80% Source: INE, Banco de Espana Regional house price trend growth Source: INE Regional employment trend growth Source: INE Regional house prices Value of mortgage loan outstanding by region Mortgage lending trend growth Source: INE GDP and employment Source: IMF, INE, Cebr analysis National housing supply Source: INE, Cebr analysis National house prices Level and depth of negative equity by region 1. The initial LTV ratio for a mortgage with an LTV greater than 80% was set at 85% 2. National assumptions on mortgage term and proportions of mortgages with LTV>80% were used at the regional level 3. Regional mortgage data between Q and Q was sourced from the INE 4. Forecasts of the level and depth of negative equity were undertaken by updating all the above variables with 2014 and 2015 values

29 130% 120% 110% 100% 90% 80% 70% 60% Negative equity in Spain December 2013 Figure 2: Evolution in 85% LTV mortgages, by date of approval Each line represents the changing LTV ratio of a cohort of households taking out a mortgage in a particular period In negative equity Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q The Prospects Service Centre for economics and business research, 2013

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