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The financial crisis and the housing market in Spain

How does it affect your decision to buy a property in Spain?
André Johnsen, Published june 5th 2012

After the financial crisis hit Europe in 2008, the housing market in Spain has more or less stopped and housing prices have fallen steadily since the crisis struck. Many Spaniards and foreigners had invested in property in Spain ahead of the financial crisis and a major part of Spain's economy was based on purchasing and salling of properties. Now, many homeowners are stuck with unsold homes and mortgages that they can not afford. This has led to a strong pressure on Spanish banks that arrange a large number of foreclosures in Spain every day. However throwing out the owner of the house when he no longer can pay the mortgage is not a good solution if the bank also is stuck on a huge inventory of homes that they can not manage to sell.

Every day new homes in Spain are being sold at a foreclosure. Evictions of families often lead to large demonstrations and the police always come up with great forces to prevent the demonstrators to stop the execution of an eviction. The number of foreclosures in Spain is a sad result of the high unemployment rate affecting the country. The heavy cutbacks that the Spanish government is now implementing does not stimulate economic growth, resulting in lower consumption which has been confirmed by the fact that Spain is now in a new recession.

One of Spain's largest banks, Bankia, is currently badly hit by the financial crisis. Bankia is the result of a merger of seven smaller Spanish banks. The merger was originally implemented to be stronger in the difficult time that Spain faced with much uncertainty about the housing market and the Spanish economy.

In recent weeks, There have been several shocking news from the crisis-hit bank. It began with a message at the beginning of May that the government would inject money in the bank by converting a governmental loan into share capital. Suddenly the government had an interest in 45% of the shares of Bankia. Later this was followed by one shocking message after another.

Foreclosure of properties in Spain

Bankia has since 2011 been trying to get rid of a large proportion of the properties that they possess, including selling homes at foreclosures and online auctions. Bankia sold 4,500 homes, commercial buildings and land in 2011 to an estimated value of around 800 million euros. Nevertheless Bankia struggles to sell a large number of properties.

In late May, there were rumors of a collapse of Bankia and this triggered a bank run, ie people rushed to the ATMs to withdraw money that they had in Bankia. This of course led to an immediate fall of Bankia stocks. It is believed that Bankia need a capital injection of an astounding 19 billion euros and the government is now working to find this money.

Large losses in Bankia

The auditing firm Deloitte has refused to approve the last years accounts of Bankia, because they believe that the bank's estimated value of their property portfolio is overvalued. BFA Group, which owns Bankia, have had to adjust its annual financial results and where the BFA Group had previously published figures that showed a profit for 2011 of 41 million Euro, the books now show a deficit of 3.3 billion Euros - the largest deficit in Spain banking industry ever.

Spain affecting Europe's stock markets

After the Bankia crisis The European Central Bank has been discussing the possibility that they can provide financial support directly to European banks that are hit by the financial crisis.

The crisis in Bankia has led to sharp falls in the stock markets around the world, for fear that Bankia would collapse or that the entire Spanish economy would collapse. Spain's Prime Minister Rajoy insists that Bankia's problems do not affect the Spanish economy and that Spain does not intend to apply for assistance from the European emergency fund. Spain is now paying sky-high interest rates for their bonds and is having problems financing its national debt.

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