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News - September 2007

The Global Credit Crunch – what will happen in Spain?

The pressure on financial companies is growing, the ability to borrow is in doubt, the general level of debt is increasing and the ability to pay is falling.

That, in brief, will give you some idea of what the credit crunch is all about.

Credit (including mortgages) has been very easy to obtain over the last ten years – banks, building societies and even high street shops have been keen to offer the consumer, money. From credit cards and store cards to cheap loans and mortgages, the world appears to have been credit based. If you want that new car, home or dress then it is easier to pay for it with a credit card than cash.

Paying for a home with a credit card? You must be mad. Well, I know it seems far-fetched but there are many instances where holiday/investment property (generally new build apartments or town houses) have been secured by the purchaser just by handing over their credit card for the initial reservation deposit.

“So”, I hear you ask – “why not”?

Over the last ten years we have all been borrowing. Has anyone been saving? It appears not. Even those people with high levels of equity in their property have been re-mortgaging to obtain that extra little bit of spending power.

Consumers have been spending across the world – new cars, new gadgets and of course, new homes – be that a holiday home, an investment and in some instances a new home for the kids.

There have been a number of scares over the last twelve months within the USA that the credit crunch is about to happen. Mortgage repayments have been missed and the quality of lending has been criticised – lenders who are too keen to lend to poor quality borrowers are being found out.

Poor quality lending (known in the US as “Sub Prime Mortgage Crisis) is as much about the lax lending criteria as about the ability of the borrower to pay back his loan. We should not necessarily criticise the borrower when the lender has “relaxed” their restrictions to ensure that they get these new customers.

The property market within the US has been hit by this “crisis” as borrowers have failed to make their mortgage repayments and their lender has eventually foreclosed their mortgage ending in a repossession of the property. Even in the UK the numbers of repossessions has increased over the last twelve months.

According to the Council of Mortgage Lenders (CML) in the UK, the number of repossessions has increased by 20% in the first half of 2007. This is a worrying trend and will grab a huge number of column inches within the popular press. There is however a huge way to go before the peak level of repossessions (76,000 in 1991) as the total for 2006 was 19,600.

So, what exactly is going to happen in the coming months?

Well, for sure, banks, lenders and many financial institutions will be reviewing their lending criteria. Further rises in interest rates will start to hurt those that have, so far, survived the pinch and there is likely to be a slowing down in the UK property market.

Here in Spain, the pain has already been felt along the coastal strip and this will continue to have an affect on those wishing to sell their property. Prices have fallen over the last 12 months and this will continue to affect those people who have some degree of competition. Prime locations, developments and individual properties will sell and some will sell at good money – there is still a demand for property.

Inland areas will be affected but not to the same degree. Many areas inland from the coast do not have an over-supply of properties and many buyers do not require finance. This will ensure that prices remain relatively stable other than those properties, which are obviously over priced or where vendors need to sell quickly.

Thankfully, the mortgage market in Spain is relatively young and the percentage of mortgage holders in Spain is far fewer than that in, for instance, the UK. This relatively new phenomenon will catch some borrowers out but within a macro economic climate of relative calm, the Spanish mortgage market needs to be considered however the long-term affects are likely to be minimised.

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