The 30% Solution

In a March entry entitled 'Welcome To The Neighbourhood', IBEX Salad mentioned what was one of the more probable escape routes from the current real estate crisis and its consequent problems for the banking sector - the Vivienda de Protección Oficial, or Officially Protected Residence. The program, as we explained, dates from 1963 and intends to make affordable the purchase of an apartment or house for Spaniards of less than average means. This initiative is so popular that entry is normally adjudicated by lottery to accommodate oversubscription. The basic terms are as follows:

1). Dwellings have a maximum floor space of 90 square metres;
2). The price at which they come to market is determined by decree, and purchase (and even the construction itself) may be subsidized by the government of the region in which they are built;
3). The units cannot be sold by the new owners, without special permission, within 10 years of their purchase;
4). Normally, the projects are classified as VPO's in the original building permit;
5). Existing private sale developments may, however, be redefined as VPO's within one year of their having been finished, provided they fit within the regulatory framework and are priced accordingly.

It is this last item which is of interest to us.

In the aftermath of Murcia's recent announcement of the specific regulatory terms (even though news items that we can find bear no details) under which existing developments may be transformed to subsidized housing, the president of the Junta de Andalucía, the region whose coastal developments are bearing the real brunt of the downturn, last week announced that this community would be doing the same. Today's internet edition of El Ideal reports that the down-and-dirty has begun.

Andalucía's housing minister, Juan Espadas, has given builders a month and a half to come up with a list of the developments that they would be willing to see converted to VPO's - mentioning in the process that, in exchange for being able to sell their buildings 'in their entirety' within 'a few weeks', they would have to be willing discount their prices some 30% in the process. He suggested that this would mostly be of interest to promotors of dwellings in the 210,000 to 234,000 euro range. Also of note was his specific singling out of 'small and medium-sized businessmen' as the most apt candidates for the program.

This last item might strike the reader as being a bit of a curiosity. Why does it matter who signs up? But it has its logic in the quickly developing crisis that the regional savings banks, the cajas de ahorros, find themselves confronting as they soon will have to face the unsavory prospect of having to roll 10 year mortgaged-backed bonds covering loans of three times the duration and guaranteed by properties of decreasing value - or worse, having foreclosurers suddenly convert them into both property owners and financers under the same circumstances. The fact is that the very large constructors are probably funded, if not partially owned, by the big banks, but the group of local empresarios to which Espadas is directing himself would most likely have resorted to the cajas to allow their plans to go forward. Given that these institutions are also, in many senses, the financial arm of the regional governments, their solvency must be protected at all costs. Hence the targetting.

As to who pays the cost for this decreed salvation, most directly affected would be the companies that choose to stick it out in an environment in which market price has been decreed. In second place might be the building industry itself which could have thought the PSOE-Andaluciá's 2007 promise to provide assisted housing on a massive scale to battle the unaffordability of real estate might have implied that they were going to finance its construction. That is, by the way, what president Manuel Chaves said as recently as 2007. Other losers would be owners who had bought, at market prices, in developments linked to (think 'Sun Golf Beach and Tapas Paradise Estates', Phase I of four) or neighbours of what are to become VPO's. This is not to say that these devolve into projects in the urban American sense, but it is still not the same thing. Future, however distant, price appreciation would end up being affected by this eventuality. Whether or not these developments will sell out in a matter of weeks, as Mr. Espadas claims, could also be questioned. Despite the fact that the party's pre-election promises set the upper earnings limit for buyer qualification at the exorbitantly high 2,000 euros a month (in the process killing whatever little domestic demand for housing still existed), one has to take into account how many people would be applying for mortgages based on their direct or indirect employment in the building industry. There are lots of still-employed workers that will not qualify for the mortgages. The cajas are not going to be trading one undeliverable promise for another.

As for winners, aside from the banks and the politicians (who will certainly find a surfeit of photo ops in all this), notwithstanding the above, the building industry itself will surely find some temporary relief as unfinished or minimally staffed developments move forward again. Subsidiary businesses like the massive scale manufacture of furniture in Andalucía will also get a new lease on life. Promotors themselves may salvage a small portion of the once-imagined profitability of their endeavours through the lowering of materials standards. Other big gainers would have to include people with stable employment who fall within the limits for subscription. Immediately coming to mind would be lower echelon civil servants. Whether they will bite at 2004 or 2005 prices is another matter the answer to which will be most interesting.

And what of the built-in incentive the program might provide for buyers of as yet undelivered privately built homes to walk away from their down payments? Thirty percent of 230,000 euros calculates out to a cool 69 thousand - probably 20 or 25,000 less than what they have ponied up. Add it in and we are talking a 40% discount to the buyer. The potential for bankruptcy of those builders thus left out in the cold cannot escape our attention, let alone that of nationally-based funders of the mega-developers who have been asked to not apply for inclusion. We are talking serious zero-sum hardball here.

Finally, the housing minister made special mention that 8 of the 13 Andalucian municipalities with the most demand for protected housing were to be found in Málaga province. Narrowing that down via the criterion of affordability, they would almost certainly be found on the Costa del Sol. Not to heap everyone into the same basket, but any quaint and charming notions that some foreign owners in that part of the world were to have had that intimate contact with the locals could somehow be avoided into the foreseeable future might have to be revised.