Posts Tagged ‘Interest Rates’


December 13th, 2009

Euribor 12 months, the interest rate normally used to calculate mortgage payments in Spain, fell 1 % in November to a new record low of 1.231 %. Euribor has now fallen for 14 consecutive months, and is 72 % lower than it was a year ago. As a consequence of the latest reduction in Euribor, repayments on a typical annually-resetting mortgage (140,000 euros, 25 years, Euribor + 0.5 %) will fall by around 240 Euros a month, or 2,800 euros a year.

Economic analysts expect Euribor to stay around current low levels in the months to come. Both Jean Claude Trichet, president of the ECB and Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, have said that current base rates are at the “appropriate level”.

The volume of new residential mortgages signed in September was 62,411, down 4.2 % compared to the same month last year. In value terms new residential mortgages were down 16 % to 7.3 billion euros.
The good news is the decline in new mortgage lending has been bottoming out in the last few months. It fell 31 % in June, 19 % in July, 7 % in August, and 4 % in September. If the trend continues new mortgage lending will soon be growing again year-on-year in volume terms. That will give some support to the housing market.

Story by Mark Stucklin

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December 2nd, 2009

Once a star performer in Europe’s 11-year old monetary union, Spain has become the wayward laggard. Growth data last week showed the Spanish economy – hit badly by a property market collapse and soaring unemployment – stuck firmly in recession in the third quarter, while the eurozone as a whole grew 0.4 per cent. The rollercoaster ride might suggest the European Central Bank would have difficulty calibrating policy steps to suit Spain and the other 15 eurozone countries.

During the economic crisis, Miguel Fernández Ordóñez, Spain’s central bank governor since 2006, has rarely given interviews. Talking to the Financial Times in the library of the bank’s plush Madrid headquarters, he strikes a distinctly cautious tone, but his messages are not so different from those of his colleagues in Frankfurt.

After the collapse of Lehman Brothers investment bank last year, the ECB cut its main interest rate farther and faster than ever before, to a record low of 1 per cent. He hints this monetary policy stance will remain for some time. “It is clear that any increase in [interest] rates is off the screen. The markets do not expect any change before the second half of next year,” he says.

He agrees, however, that with financial markets normalising, the ECB’s governing council should plan to remove emergency support, such as offers of unlimited liquidity for up to one year. “My reasoning is that those measures were exceptional because the markets did not work well. When the markets are working well, we should take them away because otherwise the markets will never work perfectly, ever. Support should be exceptional.”

Jean-Claude Trichet, the ECB’s president, indicated this month that the “exit strategy” would start in December, with the ending of one-year liquidity offers.

But is Spain ready for the start of such an ECB strategy, given its weak growth prospects? “Well, it’s ready for recovery,” Mr Fernández Ordóñez replies, “because recovery in Europe is the best news for Spain.” Some 70 per cent of Spain’s exports go to the eurozone, he points out. His biggest concern is that Spain pushes harder to bring public finances under control and increase labour market flexibility.

From one perspective, eurozone membership acts as a straitjacket in a downturn because devaluation is not an option. Worse, the euro is strengthening. Mr Fernández Ordóñez does not see things that way, however. “Of course you are right that we cannot devalue, and what does it mean? This means that we have to do more structural reforms so that you have the advantages [similar to those] of devaluing.”

As such, he is happy to see Spanish consumer prices falling faster than elsewhere. “Deflation in the euro area would be a disaster. But if you don’t have deflation in the euro area and we have a negative inflation differential in Spain compared with the rest of the eurozone, that would be the best thing. Reducing prices and regaining competitiveness is what we have to do.”

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November 28th, 2009

I recently read an interesting interview with Mikel Echavarren, head of Irea, a Spanish real estate consultancy, talking about the state of the real estate sector in Spain. As an experienced professional in touch with many different companies in the sector it is worth listening to what he has to say. Here is a selection of comments from his Q&A with Idealista News, the news section of the property portal Idealista.

Do you think there are any good investment opportunities in Spanish real estate today?
I think so but they are risky. In three years we’ll probably be kicking ourselves for not advising investors to invest now. There aren’t many opportunities in commercial real estate because there isn’t much product and rents haven’t yet adjusted. In residential, on the other hand, the correction has been very strong and fast. The ideal profile now is an opportunistic investor buying properties off banks by taking on the existing debt, a type of real estate venture capital.

So you think there are opportunities in a residential sector because the adjustment has already taken place?
There are hundreds of thousands of possible transactions, but not many genuine opportunities. What there is not is any financing, so anyone who wants to take advantage of this market has to take the debt with the asset, but there are still very few people prepared to do that today.

Has the price of housing and land touched bottom?
House prices touched bottom some time ago, they have already fallen all they had to fall. And the price of land has fallen faster than house prices although it could even fall a bit more. We have been saying at the top of our lungs that the price statistics published by the government are worthless, and damaging to the sector because they give international analysts the impression we are a country of idiots. In the US and the UK prices have fallen around 20% from the peak whilst here we have only fallen by 8%. We work with close to 28 property companies that have been restructured, and you see that valuations are down 30% in 2 years, and then banks buy those assets with discounts of 10-15% off valuations.

Do you think there is any residential property that will never sell?
What there is is a stock of land that will never be sold, at least not in 10 years. There are areas of Spain where the town plans look like they were designed for an invasion of extraterrestrials, parts of Almeria, Murcia and Alicante. There is an overdose of land that will lie in the warehouses of banks for many years. On the other hand, the stock of finished property will be absorbed sooner.

Is there any real demand for housing at the moment?
Yes, quite a few homes are being sold. We would have to place it at more than 200,000 homes a year. What is not selling is off-plan, as there you take the risk of the developer or builder going bankrupt. It’s a good time to buy newly built homes with Euribor at 1.24%. They won’t be any cheaper next year. And when prices start to rise they will do so at a rate of 10% per year.

How does one get the Spanish property sector to recover?
The residential sector is already recovering, just not the developers, who won’t see the light at the end of the tunnel for three years; it is very bleak for them. Clients of ours tell us they have sold a lot this summer, and some banks tell us that they have had more mortgage requests this summer than in all 2009. Furthermore, we believe that developers have dropped their prices to the minimum. There is mortgage financing available, not much, but there wasn’t any at all in 2008, and now there is. Mortgage costs are low, and it appears that the future is not going to get any worse. The recovery is underway, although this won’t show up in the official statistics until the first half of 2010. As soon as there is a general perception that things are getting better, house prices will stop falling and start rising.

Story from Idealista News

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November 25th, 2009

Euribor (12 months), the interest rate normally used to calculate mortgage payments in Spain, fell 1.4% in October to a record low of 1.243%. It has now fallen for 13 consecutive months, and is 76% lower than it was a year ago.

Monthly repayments on a typical annually-resetting mortgage (150,000 euros, 25 years) will drop by around 300 euros a month, or 4,000 euros a year, to 640 euros/month. Significantly lower monthly mortgage repayments have given many borrowers financial breathing space they did not have when Euribor stood at 5.26% in October last year. Estate agents report this is taking some pressure of the property market, by reducing the number of forced sellers. Many more borrowers can now afford to take their homes of the market in the hope of selling when the market recovers.

The average value of new residential mortgages signed in August fell 19% to 11,753 euros compared to the same time last year. The number of new mortgages signed by 6.6% to 52,482. Fewer, cheaper mortgages put downward pressure on property prices. The average interest rate on new mortgages in August was 4.3%. Interest rates from banks (4.15%) were better than savings banks or cajas (4.46%).

Many analysts expect Euribor to continue falling until the early part of 2010, further reducing the cost of money to Spanish mortgage borrowers.

Story by Mark Stucklin

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October 9th, 2009

Euribor (12 months), the interest rate normally used to calculate mortgage payments in Spain, fell 5.5% in September to a new record low of 1.261%. Euribor has now fallen for 12 consecutive months, and is 77% lower than it was a year ago.

Monthly repayments on the average annually-resetting mortgage (150,000 Euros, 30 years, Euribor +0.85%) will drop by around 435 Euros a month, or 4,150 Euros a year, to 555 Euros/month. However, many borrowers will not benefit thanks to clauses in their contracts that set a floor for interest rates.

There were 58,995 new residential mortgages signed in July, 19% less than a year ago, according to figures from the INE. In the first 7 months of the year new mortgages were down 30% compared to the same period last year.

The fall in new residential mortgages appears to be bottoming out (year-to-date in May -35%, -31% in June, and -30% in July). In value terms, new mortgage lending fell 34% to 6.7 billion Euros in July, or 41% in the first 7 months of the year.

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September 19th, 2009

The sharp housing correction that has sent Spain’s economy into a tailspin is bottoming out, Housing Minister Beatriz Corredor told parliament Wednesday.

“Recent indicators show a trend toward stabilization in the housing market,” Corredor said.

Spain’s once-buoyant housing market collapsed last year as the global financial crisis worsened a correction that was already underway after years of overbuilding and spiraling house prices.

Data Tuesday from Spain’s national statistics institute showed the number of houses sold in Spain rose 4.7% in July, their third consecutive month-on-month gain, though they were down 20% from July last year.

Falling housing prices and interest rates are helping to improve the affordability of housing, Corredor added, saying this should stimulate demand.

The government has offered incentives to convert unsold homes into rental properties or to sell them to qualified buyers in social-housing programs. It has also said it will limit current tax incentives on home purchases from 2011 in an attempt to bring forward decisions to buy.

In a note to investors Wednesday, Citigroup economist Giada Giani said the rise in July home sales points to an improvement in Spanish property demand, but noted that housing construction indicators continue to “decline sharply, depressed by the huge amount of unsold inventories.”

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September 1st, 2009

Euribor (12 months), the interest rate normally used to calculate mortgage payments in Spain, fell to a record low of 1.334 percent in August, down from 1.41 percent in July. Euribor is now 75 percent lower than it was this time last year, when it stood at 5.323 percent, leading to significant savings for mortgage borrowers on annually resetting mortgages.

After the fall in August, Euribor has now fallen for eleven consecutive months, setting a new record low in each of the last 6 months. Euribor has gone from record high to record low in the space of a year. However, mortgage experts do not expect Euribor to drop much further from here, certainly not below 1 percent.

Thanks to the latest drop in Euribor, the average borrower can expect to save around 316 Euros per month, or more than 3,800 Euros per year, on mortgages that reset around now. But consumer groups have complained that many banks are not passing on falling rates to customers, using the opportunity to raise the margins they charge borrowers.

Nevertheless, Spanish consumer group CECU has urged borrowers to use the fall in base rates to try and remortgage, noting that the number of people doing so is up nearly 65 percent compared to last year. CECU has also called on borrowers to report banks for including illegal clauses in mortgage contracts.

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August 31st, 2009

The number of new mortgages signed in June rose by 7.2% compared to May, suggesting that the mortgage market may be starting to recover from the credit crunch. Optimists argue this will breathe life back into the property market.

On a year on year basis, however, new mortgages signed in June were still 10.8% below the same month last year, showing that the market still has some way to go before it recovers to former levels.

These figures, from Spain’s National Institute of Statistics, also reveal that accumulated new mortgage signings were down 31% in the first 6 months of the year compared to the same period last year.

By value, new mortgages in June fell 6% year on year, but rose 4% month on month.

The average value fell 10% year on year to 142,700 Euros, but was up 5% on the previous month. In some regions, especially those where property prices are highest, the fall was more drastic. Average mortgage values fell 19% in Madrid, and 25% in Barcelona.

Average mortgage values are also down heavily in popular holiday home destinations like Malaga (Costa del Sol), down 24.5%, and The Balearics, down 30%.

The average interest rate was 4.47%, 13.8% lower than a year ago and 2.9% lower than the previous month. This figure shows that banks are passing on only a fraction of the fall in base rates to customers. Base rates are down 70% compared to June last year.

The average monthly mortgage payment has fallen from 845 Euros in June 2008, to 702 Euros today.

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July 7th, 2009

The European Central Bank will keep interest rates at a record low for more than a year and may yet need to expand its use of unconventional tools as it battles the worst recession since World War II, economists said.

ECB officials meeting in Luxembourg will leave the benchmark rate at a record low of 1 percent, according to all but two of 60 economists in a Bloomberg News survey. The central bank, led by President Jean-Claude Trichet, may keep the rate there until the fourth quarter of 2010, a separate survey shows.

The ECB last week lent banks a record 442 billion euros ($621 billion) for 12 months at its key rate in the hope they will pass on cheaper credit to companies and households. It will also start buying 60 billion euros of covered bonds this month to encourage lending. Trichet may today unveil further details of the plan, which was a compromise after policy makers failed to agree on a package twice that size.

“The ECB is pretty much done with cutting rates,” said Guillaume Menuet, an economist at Bank of America-Merrill Lynch in London. “However, they are very concerned about credit developments. If there is no improvement by October, the debate about expanding the asset purchases will resurface.”

The ECB, which holds Governing Council meetings twice a year away from its Frankfurt headquarters, announces its rate decision at 1:45 p.m. and Trichet holds a press conference 45 minutes later.

The central bank for the 16-member euro region has been reticent to follow the examples of the U.S. Federal Reserve, Bank of England and Bank of Japan, which have lowered their main rates to close to zero and are buying government and corporate bonds to reflate their economies.

The ECB, whose key rate is still the highest among the Group of Seven nations, has focused instead on getting credit flowing through the banking system again, arguing that two thirds of its economy is financed by banks.

Even so, loans to households and companies in the euro area grew at the slowest pace on record in May as the recession crimped demand for debt and prompted banks to tighten credit standards.

While the ECB’s measures have stabilized the banking sector, “they have not, at this stage, succeeded in pushing credit into the real economy,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. That could be achieved by buying corporate bonds, he said.

The ECB initially considered a package of asset purchases worth 125 billion euros that included corporate bonds and commercial paper, according to people briefed on the talks. Germany’s Axel Weber opposed buying assets of any sort. Other ECB officials, such as Athanasios Orphanides from Cyprus, have said more may need to be done to temper the risk of deflation.

Consumer prices fell 0.1 percent in June from a year earlier. That’s the lowest inflation rate Europe has seen since 1953, according to Royal Bank of Scotland. The ECB predicts the euro-region economy will contract about 4.6 percent this year.

“The primary goal should be to restore economic growth as fast as possible,” ECB council member Ewald Nowotny said at a conference on June 16. “It is necessary to use all possible means to secure a recovery,” he said in a June 19 interview, adding he expects interest rates to stay on hold into 2010.

Some policy makers are more worried that the stimulus being provided by central banks and governments will sow the seeds of future inflation. Deflation risks “are extremely limited,” ECB Executive Board member Juergen Stark said June 25. The bank will “swiftly” withdraw additional liquidity when the economy improves, he said.

There are signs that the worst of the recession may be over. The contraction in Europe’s services and manufacturing industries is slowing and confidence in the economic outlook rose to a seven-month high in June.

“The economy certainly won’t prompt any more ECB action for now,” said Aurelio Maccario, chief euro-area economist at Unicredit Group in Milan, who expects the ECB to keep rates on hold until the end of 2010. “However, if credit flows don’t start improving, Trichet will have to put his thinking cap on again in a few months.”

Story from Bloomberg

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