Good news for those hit buying Off Plan Property – Spanish Banks hold their breath
Spanish Banks are putting aside more than €150 Million Euros as the Courts turn on them for their part in the Off Plan Property disasters of the last decade.
The Spanish property boom of the early 2000s gave way to an equally big implosion in 2008. Some 7 years later as the dust continues to settle and the media has moved on, thousands of ex Pats are still affected. A law passed last week in Andalucía, allowing houses built “off plan” by developers during the boom to become legal means that for many the nightmare is coming to an end. For many others however the night mare continues.
Buying “Off Plan Property” is effectively buying a plot of land on which a house will be built. Prior to the 2008 crisis, property developers offered great prices on these plots as a way of financing the project. In an ideal market there would be no loser, the buyer makes a large gain by buying early on and selling once complete, and the property developer is able to build with the finance from selling a percentage of properties before they are built. Regrettably for those who bought in Spain during the property boom, which was not the ideal market conditions, there were three main problems – local Politics, global Economics and the Law.
The political problem was the local councils who were keen to see their communities growing, more houses meant more people, and more people means more revenue for local business and for the council themselves. Builders and developers who had not applied for planning permission were allowed to continue building. Planning rules were changed to change agricultural land into urban land. Then elections came, along with new Councils and the rules changed once more. Buyers found that the planning permission promised for their new home was rejected, or worse that the urban plan had been altered and their homes now stood on agricultural land once more. Habitation Licenses, legalizing the home were not granted, and therefore the owners were not entitled to water or electricity, further down the line there would be fights with the demolition crews.
In retrospect the Economics at the time were a big issue too. Consider that in Spain in 1986 debt represented around a third of disposable income and by 2005 some thirty years later, it had risen to 105%. Also of note is that in the fourteen years from 1990 to 2004, the average length of mortgages doubled from 12 to 25 years. Spain then, by 2005 had become a country living in debt. Factor in that housing bubble in Spain expanded at such a pace from 2000 that by 2010 there were nearly 25 million new homes on the books. Property prices rose by nearly 150% in that period. Its no surprise then that Developers and Builders were so highly geared when they began projects and in many cases, rather predictably, ran out of funds.
When the developers and builders entered bankruptcy many houses stood half-finished and crucially remained without a habitation licence, many were never built at all. Indeed if you drive along the coast road, from Malaga to Marbella in contrast to glorious views of Africa across the glimmering waters of the Med, you can see many of these “new” developments unfinished and littered with graffiti. Its important to remember that many of these buyers were not investors, rather those buying into their dream.
In the end many buyers found themselves in a sort of legal limbo, the houses that they had paid for were to all intents and purposes either illegal or non-existent, and their money was swallowed up by bankrupt developers and builders. Even those that had house that were built, they could not, without the habitation licence, have access to electricity, water.
As it transpired, through the stubborn and hard graft of a British ex pat who thought he had lost €45,000 on two apartments that were never built, Spanish Law did have an answer. It was made back in 1968 when Spain was experiencing an “economic miracle”. Spaniards were moving from the small towns and villages to the ever growing cities in search of riches. Houses were shooting up to accommodate the wave and in order to protect buyers from dodgy developments, a law was passed obliging banks to protect money paid to developers. It requires that a Bank places money paid from a buyer to a property developer into a separate account which the bank should guarantee. The money would be payable once the habitation licences were granted.
As the claims began to mount up, it became obvious that the Banks, during the 2000s, had not been protecting the deposits or in fact checking out the developers before they passed over their customer’s money. Furthermore the banks were refusing to return the deposits, which they should have guaranteed. Regrettably, in the past there has been a measure of respect granted from the Judiciary to the Financial Sector. As such the Spanish Courts were initially not keen to support claims against the banks. Buyers of the properties were, frustratingly, unable to recover their deposits even though Spanish Law required banks to protect them.
Recently this has all changed, and the banks have found themselves in the firing line. There has been a meteoric rise in successful consumer claims against the banks. Take the Clausula Suelo, we know it as an Interest Floor Clause or a Collar Clause. This clause places a lower limit on the interest payable on mortgages. The Spanish Supreme court this year declared that where these had not been properly explained to customers, they were null and void and customers should be duly compensated. So many mortgages contained this clause that it is estimated that the top five banks, after paying compensation and fines will lose €798 million euros.
If this was not bad news enough, the Spanish Supreme Court’s decision in August to begin to enforce claims against banks who did not guarantee deposits, really underlined the change in attitudes. According to Augustin Azparren, a Judge and member of General Council of the Judiciary “the changes in attitude come from the development of our Law here in Spain, the banks enjoyed the highs pre crisis, but must take the responsibility where it is due”.