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Cablegate: Real Estate Market Downturn Raises Unemployment

VZCZCXRO1346
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHMD #2306/01 3621810
ZNR UUUUU ZZH
P 281810Z DEC 07
FM AMEMBASSY MADRID
TO RUEHC/SECSTATE WASHDC PRIORITY 4014
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAS/AMEMBASSY ALGIERS 3981
RUEHRB/AMEMBASSY RABAT 6077
RUEHLA/AMCONSUL BARCELONA 3214

UNCLAS SECTION 01 OF 02 MADRID 002306

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON SP PREL
SUBJECT: REAL ESTATE MARKET DOWNTURN RAISES UNEMPLOYMENT
CONCERNS


MADRID 00002306 001.2 OF 002


1. (SBU) Summary. As commonly predicted, housing sales and
construction in Spain have steadily decreased this year, with
sales of new and used homes down by almost 20 percent since
the first quarter of 2007. Real estate developers are taking
the brunt of this downturn, while other players have hedged
their bets by diversifying and investing abroad. Meanwhile,
nearly all Spanish homeowners continue to pay their mortgages
on time, although higher interest rates and inflation are
making dents to their pocketbooks. Most economic analysts
continue to support a soft-landing theory, but the
unemployment effect (with estimates of lost construction jobs
reaching 300,000 for 2008) will be a key variable to watch.
End Summary.

----------------------------
END OF BOOM: HOME SALES DOWN
----------------------------

2. (SBU) Following a 10-year boom, Spain's residential
real-estate market is finally experiencing the slowdown
long-predicted by so many experts. Decreasing levels of
demand coupled with oversupply and tighter credit have
finally taken their toll. Statistics compiled by the College
of Property Registrars show that sales of both new and used
homes decreased steadily in 2007 with 232,358 registered
sales in the first quarter and only 188,256 in the third
quarter. Representatives of the G-14 industry association,
which represents 14 of the biggest real estate companies in
Spain, told reporters December 16 that housing starts since
August were down 40 percent compared with the same period a
year earlier. Furthermore, there are indications that home
prices are also starting to decline based on data from a
recent local survey showing that used home prices in Madrid
and Barcelona were down by 0.3 percent and 2 percent,
respectively.

--------------------------------------------- -------
DEVELOPERS IN TROUBLE, WHILE OTHERS HAVE DIVERSIFIED
--------------------------------------------- -------

3. (SBU) Real estate developers are feeling the brunt of this
downward turn and have booked sharp declines in profits.
High profile collapses such as Valencia real estate developer
Llanera (forced into receivership), Barcelona property firm
Habitat (fell behind in payments to creditors), and Basque
property developer Ereaga (declared insolvency) are beginning
to make the news. Analysts are also concerned about the
resilience of hundreds of smaller developers that cropped up
during the boom.

4. (SBU) On the other hand, developers that expanded abroad
are surviving and are continuing their investments in Eastern
Europe, North Africa, and Latin and North America. According
to Bank of Spain data, Spanish home buyers are following this
example by investing more than 5.5 billion euros in first or
second homes abroad so far in 2007, a significant increase
from 3.4 billion in 2006.

5. (SBU) Construction firms appear less exposed to the
slowing housing construction market, in part because
government-supported infrastructure projects comprise a large
portion of Spain's construction activity. Additionally,
commercial property sales have generally not followed the
same downward trend as residential real estate since demand
for office space remains high. The share prices of real
estate firms are taking a beating, construction companies
much less so.

6. (SBU) Prominent Spanish construction firms such as
Ferrovial, ACS FCC, Accionia, OHL, and Sacyr Vallehermoso
have also minimized their exposure by developing stable,
growing overseas operations. FCC has become the second
largest industrial waste player in the United States, while
Acciona has become the world's third largest wind-power. OHL
recently won five water purification and delivery contracts
in the Czech Republic while Sacyr Vallehermoso announced
recently that it would be partnering with the Libyan Company
for Development and Investment to work on large-scale
infrastructure projects in Libya.


-----------------------
HOMEOWNERS OK - FOR NOW
-----------------------

7. (SBU) Meanwhile, Spanish homeowners continue to pay their
mortgages, although overall nonpayment of all types of loans
is inching upwards. Default levels remain low by European
standards at 0.82%. With monthly mortgage payments averaging

MADRID 00002306 002.2 OF 002


half of take home pay, increased inflation and interest rates
will likely cause strain to borrowers. Since the majority of
Spanish mortgages are variable rate mortgages tied to the
Euribor (which has risen significantly over the last year)
borrowers are being forced to spend more on mortgage payments
than they did a year ago. Despite these pressures, the
common consensus is that most homeowners will continue to be
able to make their payments, buffered by savings or other
adjustments.

8. (SBU) Future unemployment may be the figurative straw that
breaks the camel's back for some homeowners, as up to 20
percent of Spain's workforce is tied in some way to the
construction economy according to Ministry of Labor data.
Minister of Housing Carme Chacon recently noted that the
level of newly constructed homes in 2008 would decrease by
250,000, an amount which real-estate company Martinasa
President Fernando Martin optimistically estimated would
erase "only" 300,000 construction jobs. Martin, bankers, and
GOS officials have argued that the economy will be able to
absorb many of these laid-off workers since net employment is
still rising, albeit more slowly. However, it is not clear
how many of those laid off will be able to find new jobs if
the overall economic climate deteriorates.


-------
COMMENT
-------

9. (SBU) While GOS officials downplay the effects of the
housing market downturn, others are not as optimistic. The
timing of this slump in particular is uncomfortable for this
government as it heads into an election. In addition to a
slowing economy, the threat of employment loss looms on the
horizon. Whether developers will be able to meet their
substantial debt obligations is also an important question.
Some experts estimate that 60 percent of Spain's financial
sector (banks and savings banks) go to real estate lending, a
significant portion of which goes to developers. Despite
these concerns, most local experts continue to predict a soft
landing.
AGUIRRE

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