Research house Variant Perception highlighted last week how Spanish property prices might be being artificially supported via the role banks play in the valuation process in Spain — the report essentially raising questions over whether assets were being fairly valued or not.

Economist Edward Hugh explains : 

Basically Spanish “escrituras de hipoteca” (or mortgage agreements) require that the “valor de tasacion” as well as the amount secured is specified in the deed. The “valor de tasacion” is in effect the valuation of the property and it is put in the deed so that the amount of the debt can never actually exceed the value of the assets being mortgaged.

However since the banks don’t know when they might need to “exercise” (or recover) the mortgage, they don’t really want to compromise themselves in advance, and the typical way of handling the problem legally is to state in the “escritura” (or title deed) that it is agreed that the “valor de tasacion” for purposes of “exercising” the mortgage will be equal to the total amount of the debt outstanding plus the rolled-up interest.

This is a very convenient solution for the banks, since it gives outsiders the impression that there is what one might call a valuation in the UK or US sense, when what is really involved is simply a formula applied in order to structure legal documentation

In that sense, Hugh points out, valuation processes in Spain differ significantly to those in the UK or US, being as they are the outcome of a machine-like calculating process more than anything else. Meanwhile, he adds, no one in their right minds would ever equate the values arrived at with the sums they would plausibly pay for the assets themselves…