Academic journal article International Journal of Business

Spanish Banks and the Housing Crisis: Worse Than the Subprime Crisis?

Academic journal article International Journal of Business

Spanish Banks and the Housing Crisis: Worse Than the Subprime Crisis?

Article excerpt


The subprime crisis has retained much of the public attention since 2007. Nevertheless, European countries had also endured several assets inflation linked to the low level of the interest rates since 2001. Among the Euro zone, the effects of the Spanish housing crisis should be analyzed carefully. The main facts about the Spanish housing bubble are particularly striking. The Spanish economy has produced a stock of 2 millions of empty accommodations in 2010, the same amount than the US subprime crisis. The Spanish GDP represents 10% of the USA GDP and the Spanish population is 6 times lower than the American one. This brief sum up of the Spanish situation shows its particular severity. The aim of the paper is not to establish a comparison between the American subprime crisis and the Spanish housing crisis. It will be worthless to set up a virtual competition between two very different cases. The aim of the paper is to explain the origins of the Spanish housing crisis and to examine the risks born by the Spanish banking system. The Spanish banking system is facing an increase in the amount of doubtful loans. The major part of this increase is due to housing crisis. Banks has taken risks on the supply side of the housing market by financing construction projects and real estate services. They have also taken risks on the demand side by financing households with variable interest rate loans. The official communication is only done with the rate of doubtful loans from the households. The paper provides several evidences that the risks born by Spanish banking system are under evaluated.


Spanish economy was stricken by a very severe recession since the end of 2007. At the mid 2011, the rate of unemployment has reached more than 20% of the workforce, the government faces a difficult fiscal situation and the interest rate gap for treasury bonds with Germany is widening. The Spanish economy has built up 2 millions of empty dwellings, and we will first examine the causes of the crisis. There are institutional and external factors such as the euro zone mechanisms, but there also Spanish internal causes.

First of all, a market economy depends on the price mechanism. In the Spanish case, two main prices were manipulated, and for a long time, these prices couldn't produce the necessary adjustment. The exchange rate and interest rate has created incentives for Spanish entrepreneurs to invest in the housing sector. During the 2001-2007 period, Spain was able to finance its public debt and all the housing projects with very cheap interest rates. The Spanish interest rate was very near to the German one, but the risks and the productivity of the Spanish economy were very different from Germany.

Spain belongs to the Euro zone, so its economy has to compete with other European countries under a fixed exchange rate regime. Spanish economy has suffered more inflation and less productivity gains than the other Euro zone countries such as Germany. The lack of price competiveness prevents Spanish entrepreneurs to succeed in tradable goods industries. So the Spanish entrepreneurs preferred to develop non-tradable goods industries such as real estate, construction or tourism.

The asset inflation in housing also depends on the characteristics of the Spanish housing market. Owners dominate Spanish housing market, and the rental market is marginal: owners occupy 85% of the accommodations and only 15% are available for rental. (1) The rental market is crippled by an over protecting regulation for tenants. (2) This regulation prevents people to buy flats in order to rent them. There is a paradox about housing in Spain: the Spanish economy has produced a lot of accommodations but young people stay for a very long time with their parents because there are not enough accommodations available for rent, and the ownership is not affordable for them. …

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