Tighter banking rules could trigger property sell off

The Bank of Spain is considering further tightening the rules governing how banks report property asset values due to fears they are keeping a lid on potential losses by valuing homes on their books at pre-crisis levels.

The Bank raised the required bad debt provisioning level from 10% to 20% in November but the Europa Press Agency reports this could soon rise to 30%. The move should encourage banks to value their properties more realistically and could trigger a sell-off as they decide it is no longer desirable to “hide” losses from real estate lending on their balance sheets.

Mixed news for property developers

The likely rationale for the move is to force the Spanish property market to adjust more quickly to the new post-crisis reality. With a few notable exceptions, the best holiday home deals seem to be coming from agents selling properties from foreign owners who are desperate to sell and willing to take a hit because of the strong Euro. This move is sure to create more distressed inventory at more realistic prices, putting further pressure on developers’ margins.

In the short term, it is bad news for many developers, especially those with product in sub-prime locations; but the short term pain maybe a necessary condition for the market to return to “normal”.

Further coverage on Reuters