Something just cracked in the mortgage market in Spain

Spain has already experienced one of its most spectacular housing bubbles and crashes so far this century. As pressures begin to build in the mortgage market, the government and banks are trying hard to avoid a restart.

After weeks of negotiations with banking associations and the Bank of Spain, the Spanish government has authorized a package of relief measures for the country’s most vulnerable mortgage holders. On Tuesday, Sanchez’s government approved measures it said would ease the blow of rising mortgage costs for more than a million households. The procedures are subject to final negotiations with the banking associations, which have a month to register before implementation scheduled for next year.

As the Financial Times noted on Tuesday, Spain is one of the first European countries to take emergency measures to cushion the impact of rapidly rising interest rates on families already struggling with rising inflation:

Spain is particularly vulnerable to interest rate hikes by the European Central Bank because about three-quarters of mortgage holders have variable-rate loan contracts linked to its monetary policy, although it is generally adjusted only once a year.

As data from Spain’s National Institute of Statistics shows, in August 72% of newly signed mortgages had a fixed rate while 28% had a variable rate. But this is a relatively new trend. In 2020, the ratio is roughly 50/50. In 2016, 90% of all new mortgages were variable rate and in 2009 it was a staggering 96%.

In other words, Spanish homeowners have been making the most of the low, zero and ultimately negative interest rate policies of the European Central Bank, while giving little thought to the potential risks of a sudden reversal. But it’s not just the borrowers who have been reckless; So were the lenders. As reported Wolf Street In 2017, the biggest beneficiaries of the ECB’s ZIRP and NIRP were Spanish banks, which made sure to include so-called “minimum clauses” in their variable-rate mortgage contracts. These set a lower rate, usually between 3% and 4.5% but in some cases as high as 5.5%, for variable rate mortgages, even when the Euribor falls below zero.

As a result, most Spanish banks have been able to enjoy nearly all the benefits of free money while avoiding one of the biggest drawbacks: having to offer customers cheap interest rates on variable rate mortgages.

While this was not entirely illegal, most banks failed to properly inform their customers that the mortgage contract included such a clause. In 2016, the European Court of Justice deemed the clauses offensive. At some point, it looked as if the European Court of Justice would require all Spanish banks that used de minimis clauses to repay customers all the money they had surreptitiously paid them. In the end, it didn’t happen though deck items have since been banned.

Now, Spain has approximately 5.5 million mortgage holders, of whom nearly four million have variable rate mortgages. Just over a million of them will qualify for the relief package.

The most vulnerable families, defined as those with an annual income of less than €25,200, would be able to lower interest rates to Euribor minus 0.1 percentage point under the proposed measures. Many mortgage holders pay 1 percentage point higher than the Euribor, which is an interbank rate that anticipates moves by the European Central Bank.

The agreement also includes a new code of practice for struggling middle-class families. This set of measures, which will be in effect for two years, is intended to help families adjust more gradually to the new interest rate environment. To qualify for relief, the family must have an annual income of less than €29,400. Their mortgage load must also be more than 30% of their income and their monthly payments must have increased by at least 20% due to recent interest rate increases by the European Central Bank.

Those increases pushed the European Central Bank’s deposit rate from -0.5% in July to 1.5% in late October, its highest level since 2011. The eurozone’s 12-month benchmark, the Euribor, on which many mortgages are based Spanish real estate, 2.84%. on November 22, the highest level since January 2009. The European Central Bank is expected to continue raising interest rates over the coming months.

For holders of variable rate mortgages in the 19 eurozone member states, this means having to pay more in monthly instalments, just as prices for basic commodities, including energy and food, have risen. In the case of a 25-year Spanish mortgage averaging €150,000 with a 1% spread on Euribor, the monthly payment would jump from around €535 to €750 – an increase of around €215 per month, or €2,580 per year.

The new relief package will mean that a family with a mortgage of €120,000 and a monthly payment of €524 linked to the European Central Bank’s recent increases will see their payments halved to €246, Spain’s Economy Minister Nadia Calvino says. Eligible borrowers will also be able to extend their loan term for up to seven years. However, as Spain’s consumer protection agency ADICAE warns, that would lead borrowers to pay more in interest in total – despite their lower monthly payments – and also, in many cases, having to pay off their mortgage until they retire.

For Spanish banks, extending the term of loans while maintaining the monthly repayment amounts for defaulted borrowers will be of great benefit in the short term. This means that they will not have to record – and thus provide for – arrears in loan repayments on their balance sheets.

There’s also another major issue at stake: An average income of €29,400 might be enough to qualify someone for a 25- or 30-year mortgage in one of the poorer parts of Spain, such as Extremadura, parts of Andalusia, and Castilla-La. Mancha, Murcia, Ceuta and Melilla, but it will not take out a mortgage in the main centers of economic activity such as Madrid, Barcelona, ​​Bilbao, Valencia, Palma de Mallorca and San Sebastian. Many mortgage holders in these cities also suffer from higher costs but would not qualify for mortgage forgiveness—unless, of course, the relief package is expanded.

Of course, all this defies all logic. The European Central Bank is rapidly raising interest rates right now in a (likely futile) attempt to tame spiraling inflation, despite the fact that price hikes are largely driven by supply-side factors. They include European governments’ continued support for sanctions against the largest provider of energy and other vital commodities, which has led to skyrocketing energy prices and general inflation. In other words, European governments are largely responsible for the rising costs in Europe.

The ECB’s response has been to exacerbate the emerging economic crisis. And the more interest rates are raised, the greater the economic pain it causes. As this pain grew, European governments and commercial banks began scrambling to insulate borrowers from the effects of those high rates. And these effects will only increase as rates go up.


Of course, the writing has been on the wall for some time. As Yves recently warned, a financial crisis is now almost inevitable. The combination of a surging dollar, rapidly rising interest rates, and decades-high inflation, on top of all the economic pain caused by the pandemic, is putting tremendous stress on highly indebted households, businesses, and economies around the world.

In late September, the European Systemic Risk Board (ESRB), an advisory body set up in the aftermath of the global financial crisis to monitor macroprudential risks bubbling under the surface of the European economy, issued a “general warning” about Europe’s financial situation. the system. The ESRB speaks with the full authority of the EU’s two most powerful institutions, the Commission and the European Central Bank.

As I pointed out at the time, central banks are usually the last to admit that a crisis is about to strike. When they finally sound the alarm, it generally means that the damage has already been done and that the crisis – which they have always helped create – is already there. The first ESRB warning states:

[T]The deterioration in the macroeconomic outlook coupled with the tightening of financing conditions implies a renewed increase in balance sheet pressures on non-financial corporations (NFCs) and households, particularly in the sectors and member states hardest hit by the rapid increase in energy prices. These developments affect the ability to service debt in NFC and households.

This is what seems to be happening now in Spain, which, like the United Kingdom a couple of months ago, seems to be playing the canary in the coal mine. Two weeks after the ERSB issued its first-ever “public warning”, the European Banking Authority sounded the alarm about the growing array of risks in Europe’s housing markets:

The macroeconomic environment has suddenly deteriorated, and the likelihood of a recession has increased. High inflationary pressures and the resulting increases in interest rates have led to an increase in the cost of living without corresponding increases in income. This is a challenge, especially for low-income and highly indebted families. Geopolitical uncertainty and the energy crisis are affecting consumer and business confidence. Although employment rates remain high, housing demand and real estate markets can still be affected by these developments.

In October, Spain saw the largest drop in mortgage approvals since 2008. And that’s just the beginning, according to the Bank of Spain. for every the scientist (my own translation):

The deteriorating economic situation caused banks to start closing the credit taps. This trend was most evident in the mortgage sector, which in the third quarter suffered its biggest decline since 2008, after six consecutive quarters of growth.

This sharp decline in mortgage approvals is due, on the one hand, to the fact that banks have become more risk averse due to worsening macroeconomic prospects, which has led them to be more rigorous and, to a lesser extent, to the truth. Bank customers are applying for lower mortgages due to higher interest rates and the cost of financing.

Another risk, of course, is that growing numbers of mortgage holders who don’t qualify for debt forgiveness (and other borrowers, including corporations) start defaulting on their debts. Spain has already experienced one of the most spectacular housing booms and busts so far this century, which by 2015 resulted in more than 600,000 foreclosures (and remember, mortgages in Spain are a haven, which means banks can go after the borrower for all of the outstanding debts). once the house is resold).

It also led to the collapse of multiple savings banks and a system-wide bailout. Perhaps it is no wonder that the government and banks are trying so hard to avoid another housing crisis. But as another (largely self-inflicted) economic crisis looms, which could be worse than the last, it is likely to be a tall order.

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