Time to swing the wrecking ball on Spain's vacant homes?

Five years after Spain's property bubble burst, hundreds of thousands of new and unfinished properties remain unsold throughout the country. Finding buyers will be a slow process: in a country where the perceived wisdom has always been that bricks and mortar never go down in value, real estate companies, as well as homeowners, have had to get used to the idea of selling at lower prices, assuming that the banks start lending again. Meanwhile, some of the biggest companies in the world have had to eat humble pie, reduce their size, and in some cases have simply been swept away.

Slowly, and reluctantly, the property sector is facing up to one of the major reasons nobody is buying property: the huge numbers of homes that remain unsold, some of them unfinished. This is the case for the major financial institutions, as well as Sareb - the so-called "bad bank" set up to sell the vast portfolio of real estate accumulated by failed, and subsequently nationalized, banks after the property companies they had financed went belly up. As happened in Ireland and the United States, which were also hit hard by the collapse of the property sector, one solution may simply be to knock some of them down.

Estimates of the number of unsold houses range between the government's figure of 675,000 and the 815,000 calculated by savings bank CatalunyaCaixa. To this figure also needs to be added the close to half-a-million homes that are still under construction, according to both the government and the real estate sector. The areas with the largest number of unsold properties are, in order: Castellón, where one in four homes is empty according to CatalunyaCaixa; Toledo; Murcia; Almería; Tarragona; La Rioja; Alicante and Malaga.

Investment funds and foreign buyers have stepped in to take advantage of the drop in property prices, but sales are still far too slow to absorb the country's huge housing stock. The government says that in the first quarter of the year, 23,118 homes were put on the market, a figure that pales in comparison to the boom years of the first decade of the century, when around 300,000 properties were being built each quarter. But there does not seem to be much appetite even for such a small number: up to June of this year, house sales were 20,770. "There are places where homes are worthless, either because of their poor construction, or their location, and are simply a burden on the taxpayer," says Gonzalo Bernardos, a lecturer in economics at the University of Barcelona.

In Castellón, one in four homes is empty according to CatalunyaCaixa

In March, Sareb approved a business plan setting aside 103 million euros for demolition. The figure is smaller than that earmarked for maintenance work (130 million euros) or the 133 million euros for ongoing construction. Sources at Sareb say that only unfinished buildings will be knocked down, and that demolition will not take place immediately.

Spain is not the first country to take such a step. In Ireland, a country with a population of 4.5 million, there are around 300,000 empty homes, the majority of which are in huge, still mostly empty housing developments that have become known as ghost estates. Last year, Ireland's equivalent to Sareb started knocking down some of these properties. "The demolition of some homes has taken place in Ireland," says Brendan Williams, a lecturer in town planning at University College Dublin.

"These areas are far from urban centers, where there is still demand. After four or five years without any construction, the market in Dublin is beginning to show the first signs of stability, with a slight increase after falls in price of up to 50 percent."

There have also been demolitions in the United States. In 2009 in California, where there are huge numbers of newly built, still unsold properties, a Texan bank decided to knock down 16 homes in the small town of Victorville that were unfinished, because their sale price would not have covered construction costs.

Homes in some areas are worthless and simply a burden on the taxpayer"

The property sector and Sareb are now fully focused on selling the country's housing stock - at least those properties that are finished. "If the price is right, you can sell just about any property: as long as it is finished," says Luis Corral, the CEO of property consultancy Foro Consultores.

Anybody doubting his words need look no further than the vast complex built by property company El Pocero in the tiny community of Seseña, in Toledo, which is now owned by the Santander and Sabadell banks. Both have managed to sell apartments there, at the fire-sale price of 60,000 euros. The people who bought these properties before the bubble burst had to stump up 240,000 euros, say market sources.

"There are cases where the land has been sold at zero value, with a replacement cost higher than the sale price," says Corral.

These properties could only be sold for 60,000 euros because the banks were prepared to take a hit on them. But in Spain there are thousands of homes still under construction, many of which are little more than shells that have been abandoned for years. Francesc Muñoz, the head of the Autónoma University of Barcelona's (UAB) Town Planning Observatory, cites the case of a housing development called La Muela, in Zaragoza. "There are two areas there: one consists of finished homes, where there are just a few residents, and another, where everything is in place, including water, sewage, electricity and gas, and even roads and pavements, but which is completely uninhabited," says Muñoz. This week, his students studying for a master's in Landscape Management will be tasked with coming up with a project to save the development. "In two years the area has already begun to fall apart," he says.

We will not see large-scale demolitions in the immediate future"

The wear and tear on the buildings would justify their demolition, given the high maintenance costs, and the impact they are having on the price of neighboring properties. Studies have been undertaken in the United States on the costs of empty properties in the wake of the 4.5 million homes left vacant between 2000 and 2010, which represents a 44-percent increase in the stock of unoccupied homes, according to the Brookings Institution. Its report shows that in the city of Philadelphia alone, the authorities spent around 14.5 million euros a year on maintaining empty properties, which in turn resulted in a 2.6-billion-euro overall fall in house prices.

Alan Mallach, a researcher at Brookings, says banks have knocked some buildings down in the United States because they realized that the cost of finishing them was higher than their likely sale price. That said, cities such as Philadelphia, Detroit, Cleveland and Buffalo have adopted wholesale demolition policies as a way of reducing supply in the long term. He says they have spent around 145 million euros on demolitions alone.

La Muela, and hundreds of other such developments throughout Spain, faces a similar problem, except that instead of old buildings, these are unfinished properties in areas where there is virtually no demand. "We will not see large-scale demolitions, at least not in the immediate future, because society is still coming to terms with the idea that property is not worth what it once was," says Fernando Encinar of property website Idealista.com.

"But we do need to do this at some point: we have to knock down properties that are costing the taxpayer money to maintain through municipal taxes."

Many empty properties could be used for social purposes"

But Gonzalo Bernardos doesn't accept that the wrecking ball is necessarily the answer. The Mortgage Victims Platform, set up in the wake of the property crash to protect people unable to pay their mortgages, who not only face being kicked out of their homes but also having to return the money they borrowed, has highlighted the growing problem of homelessness in Spain. It recently occupied a property that is part of Sareb's portfolio in the town of Salt, in Girona province. The European Court of Human Rights halted procedures to have the squatters evicted. "At the very least, Sareb should have handed properties over to local councils. It may not be possible to charge rent of 100 euros a month for apartments in Barcelona, but it is in Vilafranca del Penedès, where there is no shortage of supply," says Gonzalo Bernados, who is calling for Sareb to undertake a review of its property portfolio. "Vacant lots should be used for amenities, while many empty properties could be used for social purposes," he says. Sareb's proposed demolitions are based on economic criteria. The company, which is 45 percent owned by the taxpayer, has been given 15 years to get rid of its toxic assets inherited from nationalized savings banks, and for any money it makes to be returned to the public purse.

Economist Julio Rodríguez, former president of mortgage lender Banco Hipetecario Español, says he has doubts about the transparency of Sareb's accounting procedures, and points out that it should have a clear code of conduct, given that it is using taxpayers' money. That said, he agrees that buildings that are only partially built should be demolished, while those close to completion should be finished and sold off.

Other voices say the banks, the real estate companies and Sareb should not make their decisions solely on economic criteria. "We also have to take environmental factors into account," says Lola Yllescas, a spokeswoman for the Andalusian branch of environmental NGO Ecologists in Action. She and her organization are fighting Sareb to protect land in El Palmar, close to the town of Vejer de la Frontera, in Cádiz province. Part of the land was owned by failed savings bank Caja Madrid, and then passed on to Bankia, the entity that was created in its wake. The idea was to build a tourist complex on the land. The site is now available for next to nothing.

Yllescas says she fears for land that was bought during the property boom, often ignoring legislation to protect coastal areas. She wants the government to take action to make sure that plans to build in protected areas that were delayed when the property market collapsed are not revived when the market recovers. Pilar Marcos of Greenpeace says the law requires that any damage to protected land "be undone," adding: "It isn't just about money. Construction along the coast has slowed down, but there has been no change to planning laws, and legislation to protect the environment is being eroded."

In any event, it will be some time before Spain's construction industry recovers. The country's banks are determined to reduce their exposure to the property sector by cutting back on lending to real estate companies, as well as doing all they can to sell off their housing stock. It is unlikely that work will begin on unfinished properties in the short term. The experts say that as the housing stock is gradually reduced, the matter of what to do with half-completed properties will be addressed. In some cases, the demolition crews will be called in. "Sooner or later we'll see a story on the news of a housing development that is being knocked down," says Fernando Encinar.