VZCZCXRO1346
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #2306/01 3621810
ZNR UUUUU ZZH
P 281810Z DEC 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 4014
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 3981
RUEHRB/AMEMBASSY RABAT 6077
RUEHLA/AMCONSUL BARCELONA 3214

UNCLAS SECTION 01 OF 02 MADRID 002306 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON SP PREL
SUBJECT: REAL ESTATE MARKET DOWNTURN RAISES UNEMPLOYMENT 
CONCERNS 
 
 
MADRID 00002306  001.2 OF 002 
 
 
 ¶1. (SBU) Summary.  As commonly predicted, housing sales and 
construction in Spain have steadily decreased this year, with 
sales of new and used homes down by almost 20 percent since 
the first quarter of 2007.  Real estate developers are taking 
the brunt of this downturn, while other players have hedged 
their bets by diversifying and investing abroad.  Meanwhile, 
nearly all Spanish homeowners continue to pay their mortgages 
on time, although higher interest rates and inflation are 
making dents to their pocketbooks.  Most economic analysts 
continue to support a soft-landing theory, but the 
unemployment effect (with estimates of lost construction jobs 
reaching 300,000 for 2008) will be a key variable to watch. 
End Summary. 
 
---------------------------- 
END OF BOOM: HOME SALES DOWN 
---------------------------- 
 
¶2. (SBU) Following a 10-year boom, Spain's residential 
real-estate market is finally experiencing the slowdown 
long-predicted by so many experts.  Decreasing levels of 
demand coupled with oversupply and tighter credit have 
finally taken their toll.  Statistics compiled by the College 
of Property Registrars show that sales of both new and used 
homes decreased steadily in 2007 with 232,358 registered 
sales in the first quarter and only 188,256 in the third 
quarter.  Representatives of the G-14 industry association, 
which represents 14 of the biggest real estate companies in 
Spain, told reporters December 16 that housing starts since 
August were down 40 percent compared with the same period a 
year earlier.  Furthermore, there are indications that home 
prices are also starting to decline based on data from a 
recent local survey showing that used home prices in Madrid 
and Barcelona were down by 0.3 percent and 2 percent, 
respectively. 
 
--------------------------------------------- ------- 
DEVELOPERS IN TROUBLE, WHILE OTHERS HAVE DIVERSIFIED 
--------------------------------------------- ------- 
 
¶3. (SBU) Real estate developers are feeling the brunt of this 
downward turn and have booked sharp declines in profits. 
High profile collapses such as Valencia real estate developer 
Llanera (forced into receivership), Barcelona property firm 
Habitat (fell behind in payments to creditors), and Basque 
property developer Ereaga (declared insolvency) are beginning 
to make the news.  Analysts are also concerned about the 
resilience of hundreds of smaller developers that cropped up 
during the boom. 
 
¶4. (SBU) On the other hand, developers that expanded abroad 
are surviving and are continuing their investments in Eastern 
Europe, North Africa, and Latin and North America.  According 
to Bank of Spain data, Spanish home buyers are following this 
example by investing more than 5.5 billion euros in first or 
second homes abroad so far in 2007, a significant increase 
from 3.4 billion in 2006. 
 
¶5. (SBU) Construction firms appear less exposed to the 
slowing housing construction market, in part because 
government-supported infrastructure projects comprise a large 
portion of Spain's construction activity.  Additionally, 
commercial property sales have generally not followed the 
same downward trend as residential real estate since demand 
for office space remains high.  The share prices of real 
estate firms are taking a beating, construction companies 
much less so. 
 
¶6. (SBU) Prominent Spanish construction firms such as 
Ferrovial, ACS FCC, Accionia, OHL, and Sacyr Vallehermoso 
have also minimized their exposure by developing stable, 
growing overseas operations.  FCC has become the second 
largest industrial waste player in the United States, while 
Acciona has become the world's third largest wind-power.  OHL 
recently won five water purification and delivery contracts 
in the Czech Republic while Sacyr Vallehermoso announced 
recently that it would be partnering with the Libyan Company 
for Development and Investment to work on large-scale 
infrastructure projects in Libya. 
 
 
----------------------- 
HOMEOWNERS OK - FOR NOW 
----------------------- 
 
¶7. (SBU) Meanwhile, Spanish homeowners continue to pay their 
mortgages, although overall nonpayment of all types of loans 
is inching upwards.  Default levels remain low by European 
standards at 0.82%.  With monthly mortgage payments averaging 
 
MADRID 00002306  002.2 OF 002 
 
 
half of take home pay, increased inflation and interest rates 
will likely cause strain to borrowers.  Since the majority of 
Spanish mortgages are variable rate mortgages tied to the 
Euribor (which has risen significantly over the last year) 
borrowers are being forced to spend more on mortgage payments 
than they did a year ago.  Despite these pressures, the 
common consensus is that most homeowners will continue to be 
able to make their payments, buffered by savings or other 
adjustments. 
 
¶8. (SBU) Future unemployment may be the figurative straw that 
breaks the camel's back for some homeowners, as up to 20 
percent of Spain's workforce is tied in some way to the 
construction economy according to Ministry of Labor data. 
Minister of Housing Carme Chacon recently noted that the 
level of newly constructed homes in 2008 would decrease by 
250,000, an amount which real-estate company Martinasa 
President Fernando Martin optimistically estimated would 
erase "only" 300,000 construction jobs.  Martin, bankers, and 
GOS officials have argued that the economy will be able to 
absorb many of these laid-off workers since net employment is 
still rising, albeit more slowly.  However, it is not clear 
how many of those laid off will be able to find new jobs if 
the overall economic climate deteriorates. 
 
 
------- 
COMMENT 
------- 
 
¶9. (SBU) While GOS officials downplay the effects of the 
housing market downturn, others are not as optimistic.  The 
timing of this slump in particular is uncomfortable for this 
government as it heads into an election.  In addition to a 
slowing economy, the threat of employment loss looms on the 
horizon.  Whether developers will be able to meet their 
substantial debt obligations is also an important question. 
Some experts estimate that 60 percent of Spain's financial 
sector (banks and savings banks) go to real estate lending, a 
significant portion of which goes to developers.  Despite 
these concerns, most local experts continue to predict a soft 
landing. 
AGUIRRE