Edward Hugh over at A Fistful Euros flagged an article that appeared in the Spanish press on Tuesday claiming up to 20 per cent of domestic mortgages were now high risk or about to become “non performing”.
As he summarised (emphasis FT Alphaville’s):
The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted, since prices are now heading back towards the 2005 level, we can easily conclude that something in the region of one in five Spanish mortgages are now high risk.
Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.
In the charts below, the top left shows loan to value ratios; the top right shows the number of mortgages to families total amount lent to families (in million euros); the bottom left shows average proportion of disposable income devoted to servicing loans ( at 38.6 per cent in the second quarter according to the Bank of Spain); and the bottom right shows the percentage of mortgages accounting for more than 40 per cent of income.
The consequence of the the mortgage boom is that Spanish borrowers hugely vulnerable to interest rate rises, says Hugh.
Meanwhile, Hugh adds, as Spain is now in deflation incomes are likely to fall further alongside property values, meaning LTVs will rise just as the proportion of income needed to service the debt rises too.
Not a good combination.
Related links:
Bienvenido multi-cedula – FT Alphaville
Forget Latvia, what about Spain? – FT Alphaville
The pain in Spain will be felt mostly by the banks – FT Alphaville