When fissures first appeared in Spain’s residential property boom in late 2006, politicians, developers and bankers spoke about a gradual easing of prices and construction activity.

As rising interest rates and falling demand forced price adjustments, a shake-out of speculative operators would help cool the sector, they said.

Three years – and one history-making financial crisis – later, many of the developers have disappeared, filed for bankruptcy or been put on life support. Along Spain’s concrete-clad coastlines and outside its cities and towns, an estimated 1m new and unfinished homes stand vacant.

The financial, system, meanwhile has been saddled with rising bad debts and piles of hard-to-sell property in what has become Spain’s own crisis within a crisis. The forecast soft landing now seems a pipedream.

RR de Acuña & Asociados, a property research firm, recently predicted that it would take another six or seven years before residential construction and sales activity “recovers and starts to have a positive effect on the economy”.

While prudent regulation saved Spanish lenders from the worst of the global meltdown triggered by the US subprime fallout and the failure of Lehman Brothers, most have taken direct hits – in the form of asset writedowns – from the collapse or near-default of most of Spain’s most important property developers.

Nozar, a mid-sized real estate company, was the latest to succumb, filing for creditor protection in September with total debts of more than €2bn ($2.9bn). Measured by total liabilities, it was the third-biggest corporate failure in the sector, but only one of scores.

Other, larger groups such as Metrovacesa and Colonial have proved too big to fail, and today remain afloat thanks only to complex debt-for-equity and debt-for-asset swaps that have converted Spain’s banks into the country’s most important landlords and property vendors.

Estimates of how much property is currently held by financial institutions vary widely, but most agree it is nearing €20bn. Most of it appears to be residential, although the number of shopping centres, office buildings and other commercial properties on their books is set to grow as struggling real estate groups and other investors are forced to hand over more assets.

Banks, and the real estate groups they are keeping solvent, are reluctant to depress capital values in the segment further by putting them on the market, according to experts. Prices of office buildings in Madrid, for example, have fallen about 50 per cent since the end of 2007.

Instead they have “dribbled” a few out, according to Ian Cassidy, head of Savills’ Barcelona office, but will continue to sit on the bulk of them, gradually writing down their values until market conditions improve.

But in the meantime forced sales, until now rare, are likely to increase.

“A company like Colonial, for example, will hold off on selling until it is obligated by the banks to liquidate assets,” says Andrés Escarpenter, head of Jones Lang LaSalle in Madrid. For now, the sales effort is focused on the residential segment.

To this end, some banks have set up in-house sales teams or branded real estate agencies, while others have contracted the services of consultants to help sell, rent out or lease residential or commercial property.

While three years ago lenders simply pitched mortgages to clients, today they are just as likely to offer to sell them a new out-of-town house, beachside villa or city flat, with sharp discounts and good financing.

Sales are sluggish, at best, although recent figures point to faint signs of recovery in demand. According to the National Statistics Institute, home sales were down 20 per cent year-on-year in July, to just over 37,000 units. Although it was the 19th consecutive year-on-year fall, the decline was less dramatic than June’s 25 per cent fall, or May’s near 50 per cent.

According to government surveys, new home starts are set to come in at just over 100,000 this year, compared with more than 700,000 in the final years of the boom. “In other words,” ventures Madrid-based broker Iberian Equities, “the glut is slowly starting to be absorbed.”

Pol Clota, a spokesman for Catalan lender Caixa Catalunya, agrees. He says low interest rates and hopes of a bargain are drawing young couples back into the first-home market. “People now believe that if they wait another year, they might pay less,” he says, “but all the good stuff will be gone.”

Older buyers and foreigners who took flight after the bubble burst are looking again at beachside properties, he adds.

Like most vendors, Caixa Catalunya uses gimmicks to arouse interest: the bank offered €6,000 off already-discounted properties to anyone who signed up at a recent trade show.

It had 3,600 homes and flats on the market, half of which it acquired via debt exchanges with distressed developers and builders and the other half through mortgage default.

However, although resurgent buyer interest is making a dent in these and other stockpiles, Spain’s housing crisis will be playing out for years to come.

“There are no green shoots here,” said Fernando Rodríguez de Acuña from RR de Acuña & Asociados.

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