The road to demolition: Inside a Spanish ghost town

November 15, 2013, 5:08 PM UTC
Rebar sticks up from an abandoned building at the edge of La Muela, Spain

FORTUNE — On the outskirts of Zaragoza, a provincial capital on the semi-arid plains 200 miles north of Madrid, fields of huge electricity generating windmills surround the tiny town of La Muela. One might think that, in the land of Don Quixote, these giants would serve as a prosaic warning of the dangers of engaging in flights of fancy.

Walking the streets of La Muela, it quickly becomes clear that they have not. Barely two blocks outside of the village center, historic stone houses give way to condo complexes that have been finished, boarded up, and left empty. Further out, tin fences surround windowless townhouses and condos, and at the edge of town, where it returns to scrub, a half-finished concrete skeleton features stairways to nowhere.

There is finished, empty housing for some 2,000 people and unfinished housing for another 1,000 just in the center of the 5,000-person town, according to Enrique Barrao of La Muela’s town planning department.

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“There are so many empty houses; thank god people haven’t gone in like in the big cities, where there are squatters,” says Victor Canales, 49, as he gestures at a shuttered building across from his row house. Canales brought his family from Zaragoza to La Muela in 1999, attracted by the quality of life of the small town, which then had about 2,500 residents.

Like many towns in Spain — not to mention Nevada, Florida, California, and Ireland — La Muela tried to ride a speculative real estate boom during the 1990s and 2000s. With money coming in from the windmills and real estate developments, mayor María Victoria Pinilla — since brought up on real estate-related corruption charges — built a bullring, a concert hall, a sports stadium, an aviary, and three museums. (The museums are “temporarily closed for technical reasons,” according to a sign on the town’s tourism office, which is also closed.)

La Muela is not alone. Even with a 38.9% drop in home prices since a 2007 peak, according to real estate consultancy Tinsa, there are still about 750,000 unsold new housing units in Spain. Now that the bubble has popped, the question is what happens to all the excess housing. And the answer to the problem may be simple, and ugly: demolition.

“If you can’t anticipate demand for housing within a manageable period, say five years, the cost of mothballing houses, even completed ones, to keep them serviceable and habitable for the future is very expensive,” says Alan Mallach, a fellow in the Metropolitan Policy Program at the Brookings Institution. “And if you don’t, it gradually turns into an eyesore and blight for people who live around it.”

While it’s hard to pinpoint the economic effects of vacant houses, a recent Federal Reserve Bank of Cleveland study finds that having a vacant property within 500 feet reduces a house’s selling price by at least 1.4%.

Of course, making the decision to demolish housing is dangerous for a politician, especially during a crisis when many people have lost their homes to foreclosure. This may explain why so little excess housing has been demolished and why those overseeing Spain’s housing problems are not touting it as a top option.

Spain set up a “bad bank,” known as Sareb, to take over bad real estate assets during its financial crisis, and it now has an inventory of about 90,000 properties (including 55,000 housing units). The entity has set aside 103 million euros (about $140 million) for demolition, but Sareb’s communications head, Susana Díaz, stresses that the entity has no definite plans for demolition and would never demolish housing with value (though this hasn’t stopped the country’s demolition companies from preparing for business).

Still, some governments and banks have come around to demolition. Ireland’s “bad bank,” NAMA, demolished a 12-unit apartment block in County Longford last year. And there have been isolated demolitions of new and partially built houses in California. In some situations — especially in the case of unfinished, isolated developments — there may be no alternative.

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“If you have a development far from any town, forget about it. It will never bounce back,” says Antonio Argandoña, a professor of economics at Barcelona’s IESE Business School.

On a bluff overlooking the highway to Zaragoza, five miles from La Muela, deteriorating concrete skeletons mark what was once supposed to be Ciudad Zaragoza Golf, a golfing community housing development. Of the 2,316 units planned for the first phase, only 36 have been granted occupancy licenses, says La Muela town planner Enrique Barrao. The development’s handful of residents complain about non-existent municipal services, and when I ask the driver of the Zaragoza-La Muela bus line how these people get home, she shakes her head. “No bus goes there,” she says.

In downtown La Muela, however, residents are not yet thinking about demolitions; they’re still coming down from a boom in which the town even subsidized their vacations. “The town paid, wherever you went,” says Victor Canales, who took subsidized trips to the Dominican Republic, Argentina, Brazil, and Mexico. “We were a famous town for our quality of life.”

There still may be hope for La Muela. A passel of new residents have moved in, attracted by small town life and low real estate prices. At the edge of town, where the sidewalk goes to dirt, Susana Escaño straps her baby into a car seat in front of a new, sparsely occupied complex. She moved from Zaragoza three years ago, because her family couldn’t afford anything in the city.

“Now, you hit yourself in the head because what you bought is worth so little, but, oh well, I like it,” she says.


Mucha tranquilidad.”