February 24, 2024

Housing Finance Development

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Spain and Portugal tackle property crisis by embracing public housing

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Spain plans to use a “bad bank” born of its most recent financial crisis to create up to 50,000 units of public housing as the country and neighbouring Portugal seek government-led solutions to the soaring cost of property.

The countries — two of the poorest in western Europe — want to reverse a legacy of under-investment in public housing that means they have the most limited stocks of subsidised homes in the region.

The moves reflect the pain caused across Europe by a housing boom that has far outpaced wage growth in most countries. Rising rental rates, mortgage bills and property prices are for some people eclipsing food and energy prices as the worst part of the cost of living crisis.

Spain’s cabinet is set to approve a plan later on Tuesday that will boost the national stock of 290,000 public homes by 17 per cent using property from its bad bank, established in 2012 to mop up the toxic assets of failing lenders after a real estate bubble burst four years earlier.

Pedro Sánchez, Spain’s prime minister, said the move would tackle a “huge and genuine problem” by making more homes available at fair prices for young people especially. “Housing in Spain is a constitutional right, but not a real right. Young people have to wait an unacceptably long time to access housing and become independent,” he said.

Line chart of standardised price-income ratio, long term average=100 showing Housing in Portugal and Spain has become far less affordable

The gravity of the problem was underlined on Monday by new data from property portal Fotocasa that showed rental prices in Spain hit a new record high in March, rising nearly 10 per cent from a year ago to €11.55 a month per square metre.

Sharp interest rate increases by the European Central Bank over the past year mean borrowing costs for mortgage holders are now at their highest level for a decade. Spanish housing is the least affordable since the end of the country’s property boom.

In Portugal, residential properties have never been so expensive relative to earnings and there is huge angst over local residents being priced out of Lisbon and Porto, its biggest cities.

Marina Gonçalves, housing minister, told the Financial Times: “The answers in the private market are not sufficient.”

Portugal’s government approved plans last year to invest €2.4bn in public housing by the end of 2026. On Friday last week it presented a housing bill to parliament that would let the state turn vacant private properties into social housing but with rent payments still going to landlords.

“This is a problem in the whole of Europe, so we need to promote new answers,” Gonçalves said.

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While estimates vary, public housing represents roughly 2 per cent of Portugal’s housing stock and between 1 and 3 per cent of all homes in Spain — below the EU average of 7.5 per cent and far off France’s 14 per cent and nearly 17 per cent in the UK.

The figures reflect the fact that public housing has been only a sporadic policy priority on the Iberian peninsula since its dictatorships crumbled in the 1970s. Several democratically elected governments have instead used public subsidies and tax incentives to encourage people to purchase their own properties, giving the countries the highest levels of home ownership in western Europe at more than 75 per cent.

In more recent years the fiscal costs of the financial crisis that began with the 2008 property crash left the region’s governments with limited scope to embark on new spending.

The Socialist-led governments of both countries are pursuing broader reforms to make their private property markets fairer, but they say public housing is crucial.

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Spain plans to sell 21,000 empty properties from its bad bank, known as Sareb, to regional and municipal governments so they can turn them into public housing. It will also formalise the status of 14,000 Sareb homes that are occupied but in limbo because, for example, the tenants signed rental contracts with developers that subsequently went bust, according to a government official.

The final part of its plan is to make empty plots of land belonging to the bad bank — which is majority-owned by the central government — available for the construction of 15,000 new units of public housing.

Jesús Leal, a sociologist and professor at Madrid’s Complutense university, said “public housing is the only long-term solution” to an affordability crisis.

But he said he was “a little sceptical” about whether Sánchez’s new plan would be effective because Spain’s housing crisis is most acute in big cities such as Madrid, Barcelona and Valencia, whereas the bad bank’s properties are elsewhere.

Many of its real estate assets are close to Spain’s Mediterranean coast yet became toxic because they were not in prime locations but instead some distance away from the beach as well as centres of employment.

The government official said: “Obviously Sareb doesn’t have buildings in the centre of big cities. But the quantity is important. Fifty-thousand homes is a very high number compared with the total amount of public housing available today.”