VZCZCXRO3838
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #0538/01 1350845
ZNR UUUUU ZZH
P 140845Z MAY 08
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 4766
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 MADRID 000538 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PREL SP
SUBJECT: HOUSING MARKET SLUMP CONTINUES 
 
REF: A. MADRID 525 
     ¶B. MADRID 499 
     ¶C. 07 MADRID 2306 
 
¶1. (SBU) Summary. Spain's housing market slowdown was long 
predicted but is proving more severe than most local analysts 
had anticipated.  An oversupply of newly-built properties 
coupled with decreased demand has resulted in a glut of 
unsold homes.  Because of this, real estate developers are 
finding it difficult to pay back their loans, construction 
activity has sharply decreased, and unemployment has 
significantly increased.  The local media has emphasized the 
severity of this downturn, referring to the situation as a 
crisis and implying drastic effects on the broader economy. 
GOS officials and banking industry representatives are more 
optimistic and have said that they still expect a soft 
landing for the economy as a whole with an end to the 
downturn by 2010.  Despite this optimism, a key question will 
be how successful Spain's economy is in generating 
sustainable growth, investment and jobs outside the 
residential construction sector.  End Summary. 
 
------------------------------ 
Downturn Worse than Predicted? 
------------------------------ 
 
2.(SBU) Following a 10-year boom, Spain's residential real 
estate market is experiencing a downturn brought on by high 
prices, oversupply and decreasing demand.  According to 
housing analysts at the Spanish Savings Bank Association 
(CECA), from 2004 to 2007, housing starts averaged an 
unsustainable rate of 600,000-700,000 per year (more than 
Germany, the UK, and France combined), and prices rose 
rapidly.  During this period, a rate closer to 400,000 was 
justified by Spain,s demographics -- even after taking into 
account immigration and second home purchases by foreigners. 
In the end, Spain was due for a correction, particularly as 
property purchases by foreigners tapered off.  (Comment: 
Although CECA analysts did not mention it, significant 
interest rate increases between mid-2005 and mid-2007 may 
have contributed to the end of the boom as well.  End 
Comment.) 
 
3.(U) The excess supply has been compounded by a decreasing 
volume of home sales beginning in 2007.  In the fourth 
quarter of 2007, sales were down by over 20% from the fourth 
quarter of 2006, according to GOS statistics.  Even after 
sales started to decline, builders continued to complete and 
bring to market the many homes that had been started at the 
height of the boom.  This aggravated the glut of properties, 
which some experts currently estimate at upwards of 600,000 
unsold new homes. 
 
¶4. (U) As a result of the glut of unsold properties, real 
estate developers are experiencing difficulty paying back 
their loans.  International credit market difficulties have 
aggravated these financing problems.   Prominent Spanish 
construction companies and developers such as Llanera, 
Ereaga, Contsa, SEOP, and a number of others have filed for 
bankruptcy, citing the inability to meet billions of euros 
worth of short-term debt obligations.  Others have managed to 
renegotiate the terms of their loans in the short term. 
 
¶5. (SBU) Because developers and construction companies have 
reduced their residential construction activity, many workers 
in construction and related business have been left without 
employment.  Although increased unemployment was expected, 
the increase is proving to be worse than anticipated. 
National Institute for Statistics (INE) 2008 first-quarter 
data show construction-related job losses of over 400,000 
from the previous quarter.  In addition to construction 
sector job losses, the services sector was also seriously 
affected.  Spain's overall unemployment rate increased from 
8.0% in the third quarter of 2007 to 9.6% in the first 
quarter of 2008.  The current total number of unemployed 
workers is slightly over 2.3 million, and a March 2008 KPMG 
study now predicts that the sector freeze may destroy up to 
1.2 million jobs in the next two years. 
 
--------------------------------------------- ------- 
GOS Officials Still Predict Soft Landing For Economy 
--------------------------------------------- ------- 
 
¶6. (SBU) While Spanish officials acknowledge that the 
downturn has been more abrupt than anticipated, in general 
they continue to maintain that the economic situation is 
stable and headed for a soft landing.  Second Vice President 
and Economy and Finance Minister Pedro Solbes asserted at a 
May 7 legislative hearing that while the economic adjustment 
was more rapid than anticipated, the downturn would end by 
 
MADRID 00000538  002 OF 002 
 
 
the second half of 2009 with a return to 3% GDP growth in 
¶2010.  Other Spanish officials have espoused similar messages 
to us in private. 
 
¶7. (SBU) A Ministry of Housing advisor recently told us that 
she and her ministry were confident that Spain would be able 
to successfully weather the adjustment.  She asserted that 
the services sector would absorb the newly unemployed and 
that government public works programs to stimulate other 
types of construction would cushion the blow.  (Comment: 
Other officials have indicated that public works spending 
already is high and is not likely to be increased 
dramatically.  End comment.)  Furthermore, the GOS would 
increase its stock of subsidized homes for low-income 
families to help real estate companies offload unsold 
properties. 
 
¶8. (SBU) The advisor also highlighted characteristics of 
Spain's housing market that she argued would prevent the 
overall economic adjustment from becoming overly serious. 
For example, despite increases in inflation and interest 
rates, Spanish homeowners are still paying their mortgages 
and have very low delinquency rates compared with other EU 
countries.  She noted that average home down payments in 
Spain are 20 percent of the value of the property, meaning 
that homeowners in Spain have more equity in their homes and 
thus higher incentives to avoid defaulting.  Typical 
mortgages in Spain are 25-30 year adjustable rate mortgages 
tied to the Euribor interest rate. 
 
¶9. (SBU) Staff from the Spanish Savings Bank Association 
(CECA) also told post that they were continuing to predict a 
soft landing for the economy as a whole.  They called the 
housing downturn a short-term market correction that would 
reach equilibrium by 2010.  They said that the glut of 
properties was in some ways an inevitable phenomenon, 
reaching its peak as Spain's 1960s baby-boomers completed 
their property purchasing cycle.  When asked about the effect 
on the financial sector of the high number of real estate 
developers and construction companies declaring bankruptcy, 
one analyst said that Spanish banks were well-equipped to 
deal with high levels of bad loans given the Bank of Spain's 
conservative policies on reserve requirements. 
 
------- 
Comment 
------- 
 
¶10. (SBU) While on the surface GOS and financial sector 
representatives appear calm, the Spanish media continues to 
portray a grim picture of the residential construction 
situation.  Opposition Popular Party representatives have 
harshly criticized Spanish officials and accused them of 
neglect and complacency and of a failure to confront the 
crisis.  News about real estate developers or construction 
companies facing financial difficulties or other negative 
economic indicators is a daily occurrence and draws a sharp 
contrast with GOS assurances.  Although there likely is less 
urgent political concern within the GOS now that the March 9 
election has passed, there seems to be some disagreement on 
appropriate steps.  Vice President/Minister Solbes has said 
that the GOS should not try to impede "artificially" the 
necessary adjustment in the construction sector, and he has 
rejected a Housing Ministry proposal to provide tax 
incentives for residential improvements.  Still, the news in 
construction is expected to get worse before it gets better, 
and the GOS is likely to feel pressure to address the 
sector,s problems somehow. 
 
¶11. (SBU) Despite assurances from GOS officials, a critical 
issue is how Spain's economy will make the transition away 
from the residential construction sector, which recently 
accounted for up to 9 percent of Spain's GDP.  Many newly 
unemployed workers from the construction sector have low 
skill sets not easily adaptable to other sectors.  Labor and 
Housing Ministry officials have told us in the past that this 
population, many of whom are immigrants, will make the shift 
with the help of GOS initiatives to increase job training 
opportunities.  Bank economists also have been optimistic 
about the ability of the services sector to absorb many of 
the unemployed.  The extent to which this takes place will be 
crucial, as it appears that construction will not return to 
its former level for the foreseeable future. 
 
 
Llorens