Sometimes the comment facilities provided by blogs work wonders. We'll first deal with a few objections raised about the methodology, data or conclusions of the
previous post. Then we'll get to the crux of the matter - how these cost-of-carry figures change, or fail to, as seen by banks in the event of bank repossession in Spain and the United States.
Both reader Mickey and one identifying himself merely as 'J' (plus one e-mail contributor) raised the point about using PPP median income. They are correct. We chose it because it saved a lot of searching of databases. In the new table, seen below, we have inserted the OECD's gross national per capita income instead. This is also unsatisfactory, but if they don't list median income in their country profiles, who are we to argue with them.* This isn't a precision science, anyway.
J also provided us with very different figures for utilities, maintenance and community fees. In the case of the first two, he was citing costs for a lived-in dwelling - not cost-of-carry by any definition of the term. In the last case, community fees are calculated as a given unit's percentage of the total floor space of the building. Consequently, nominal costs vary according to the size of the flat. The costs themselves are divided into operating (utilities, cleaning of common areas, doorman, etcetera), provision for surprises and extraordinary items. If the last is not fully funded by the penultimate and is very large (as when the city comes along and orders an upgrading of the elevator, for example), these costs may be financed and amortized over time. The age of the building certainly affects community fees. We've increased them in the new table, as we have insurance and property taxes - resulting in an 850 euro per year increment in the total. We don't think these changes affect the conclusions, but readers may feel free to differ.
More interesting, however, might be a look at all this from the point of view of financial institutions in the two countries as they decide whether to rush to liquidate repossessed homes - tanking house prices in the process, or not. The comparison that has to be made in this regard would be the difference in the cost-of-carry of owning, for example, 50 repossessed homes in one 50-unit apartment building and that of maintaining 50 single-family, detached residences. That is what 'homes' are in the respective countries.
We suggest that the reader take the following into account:
1). The American figure will turn out to be approximately 50 times the individual cost-of-carry. There are no noticeable savings to be had. The calculations regarding raw cost-of-carry or cost-of-carry as percentage of value, relative to a price reduction and so on will not materially change as the number of examples increases;
But they will in Spain:
2). The individual Spanish homes in a repossessed development will not yet have water and electricity contracted. Savings - 32,500 per year;
2). The Spanish homes will not have individual insurance policies. Savings - 15,000/year;
3). We'll consider the community fee, which is not yet agreed upon, as a proxy for maintenance costs and leave it intact, minus the day-shift doorman that a building of this category will have. Knock 12,000 euros a year off the total;
6). The insurance policy contracted will be the standard for the common areas and may have some sort of consideration for damages that might occur to the exteriors of individual units - this typically being destruction of window blinds by hail or wind storms. To all this, possibly add extra liability coverage and something that pays for damages if squatters move in. We really have no clue, but we think that 10,000 a year might cover it. Add 10,000;
7). Maintenance for outdoor common areas. Let's guess at 12,000 a year;
8). Property taxes on the individual units will have to be paid;
9). We'll leave the annual repairs of 200 per unit intact, although we have a hard time imagining what is going to generate them. Add 10,000/year.
The spreadsheet summary is below. We think that we've allowed sufficient margin for things about which we know nothing, like building insurance, and that we've included some costs that might prove themselves to be optional, according to circumstances - the housecleaning of common areas portion of maintenance might qualify in this regard, as might the care of outdoor areas.
In the United States, the repossess-and-wait-for-better-times option, costing 2.43% of the asset's value per year, is not entirely financially appealing - especially if competitor banks are eroding the market value by putting their stock up for sale. In Spain, if the market has the minimum fluidity necessary to provide some idea of asset values
and the banking system does not lack sources of funding, retaining these property assets and converting them to mortgages, one by one, becomes a viable choice on a long enough time line**, particularly if agreement can be had among banks and
cajas to do this - something not entirely unimaginable in a country in which economic activity always organizes itself into cartels. It can also be debated that the rolling of credit to developers, if done with better repossession conditions than previously existed, is also not a bad selection among evils - and may not be substantively different in effect. Roll the loan or take back the homes, we're still stuck with asset values underpinning the whole thing.
Pablo's comment that the comparison was not apples to apples exactly describes the entire problem. The use of U.S. data to predict the future of Spanish housing prices probably suffers the most from this mismatch. As for his thought that the American example might be representative of a more affluent economic class than the Spanish, we actually think the opposite is true, in this case.
Reader Sinus is just, plain wrong - although we'd like to know what source he used to calculate 2,000 euros a year in property taxes for the Madrid example.
*We could, of course, complicate the whole matter by bringing up the 20+% submerged economy in Spain. There are lots of approximations here.**The main threat might be thought to be potential increases in interest rates. We agree, but won't put a date on it as long as demand for credit remains moribund. We think this menace is overrated.--------------------------
A few items have caught our eye as we scan the foggy landscape for guidance...
