Even Spain's Mortgage Market Is Rising Again as ECB Injects Cash

For Miriam Broncano, it was just a great time to buy the three-bedroom apartment she had her eye on in Madrid’s university quarter.

The human resources executive and her partner took out a 30-year variable rate loan set at Euribor plus one percentage point last month with Banco Bilbao Vizcaya Argentaria SA. Spain’s second-largest lender gave her a 300,000-euro ($340,000) loan, which was equivalent to about 90 percent of the price the couple paid for the property after the bank valued it a 100,000 euros more than its sale price, she said.

“The spread is unbeatable and the conditions the bank offered us would have been unthinkable just a couple of years ago,” said Broncano, 40. “The banks are really jostling with each other to woo clients.”

It’s that competition among Spanish banks that is forcing down the cost of a mortgage and driving a property market that once looked like the kiss of death for the country’s economy.

Lenders recoiled from granting mortgages as Spain headed into a real estate crash that led to a 41 billion-euro bailout for its banking industry in 2012, the height of the European debt crisis. They are now vying with each other to make home loans as gross domestic productgrows at its fastest pace in eight years and the European Central Bank suppresses borrowing costs.

The average spread that banks charge over the 12-month Euribor, the reference rate for most of the variable-rate loans that make up about 90 percent of Spanish mortgages, stands at 1.79 percentage points, the lowest since January 2012, according to data from the Bank of Spain.

Spanish house prices jumped in the second quarter, strengthening the foundations of the country’s economic recovery as Prime Minister Mariano Rajoy prepares to seek re-election in December.

The 4.2 percent quarterly increase compared with a 0.6 percent contraction in the previous three months, according to data from Spain’s National Statistics Institute. House prices are down 42 percent from their peak in 2007, according to Tinsa, a property valuation firm.

The volume of new mortgage loans rose in July to 4.2 billion euros, the highest since December 2012, a month in which there was a one-time jump in transactions before the government phased out a tax deduction for some borrowers. Excluding that effect, the increase was the biggest since the end of 2010, according to the Bank of Spain.

Even so, bankers say that competition to make mortgage loans is increasing and threatens to hurt their lending margins at a time when interest rates are close to record lows. As the ECB floods injects funds to foster growth in the euro region’s economy, the 12-month Euribor benchmark plunged to record low 0.16 percent in August from more than 5 percent in 2008.

“Competition is coming in and prices are starting to go down and the danger here is where the threshold of profitability is,” Bankinter SA CEO Maria Dolores Dancausa said last week in Madrid.

Jose Antonio Alvarez, chief executive officer at Banco Santander SA, Spain’s biggest bank, said in July that “fierce competition” in the market for loans, including mortgages, made him “not optimistic” about revenue trends.

Santander is now marketing a variable rate mortgage at Euribor plus 1.25 percentage points. Bankinter offers mortgages at 1.5 percentage points over Euribor while ING Espana has cut its mortgage rate to Euribor plus 0.99 percentage points from 1.89 percentage points a year ago.

Risks Ahead?

The plunge in mortgage costs could also become a problem for borrowers in the future when interest rates start rising. When Spain’s last mortgage bubble burst in 2007 after a decade-long boom, more than 300,000 mortgage borrowers ended up losing their homes. Mortgage lending reached a monthly peak of 17.2 billion euros in March 2006.

A first time buyer, Broncano says she pays 900 euros a month for the mortgage compared with the 1,200 euros she used to spend on renting a similar property in the city. 

“We began to see that prices for good properties in nice areas were starting to rise,” she said. “We didn’t want to miss the boat.”

Source: Bloomberg