[SPAIN]Banco de Sabadell is erecting or completing these buildings, pictured, on land it owns or financed near Barcelona.MADRID—On a weedy dirt lot here, lender Bankia is pursuing its answer to a banking and property crisis that has left Spain with a glut of around one million vacant homes. Its approach: Build even more.

Bankia and a local developer plan to build a 212-unit housing complex featuring a gym and movie theater on the central Madrid site where a bus station once stood. Construction begins early this year, even though sales of existing properties are practically nonexistent and only 45 of the planned new units have been sold in advance.

“The market is at a standstill,” said César Cabal, a real-estate broker working with the developers.

The drive to keep building in a housing market drowning in empty properties shows the depth of Spain’s banking crisis. The country’s housing bust saddled banks with not just vacant homes, but also billions of euros worth of undeveloped land.

Yet rather than writing off the land as a loss and attempting to sell it, Bankia and its peers have begun selectively building on empty lots. In some cases there are buyers lined up but in other cases there aren’t.

spain home sales chart

A Bankia spokesman said the bank is building only in high-demand areas, like central Madrid, and that the new projects are a smart way to give a dud asset new value.

There were about 700,000 vacant newly built homes at the end of 2010, the most recent numbers available, according to Spanish government figures. Including repossessed properties, some economists and real-estate consultants estimate the total could be as high as one million, or even 1.5 million. There were 19,457 housing starts in the third quarter of last year, down 7% from the second quarter and down 5% from the year-earlier period. Ernesto Tarazona of consultant Knight Frank España SA estimates that Spanish banks and cajas will develop 5,000 to 6,000 new units in the next two years.

Lenders are hoping that the moribund Spanish property market will pick back up. But that is hardly a sure thing in a country with more than 22% unemployment and uncertain growth prospects.

Banks are trolling for foreign buyers, and last year—with Spanish officials in tow—they went on property roadshows in the U.K., the Netherlands, Germany and Sweden. They served wine and Spanish ham, and pitched Spain’s sunny climate and relaxed lifestyle.

Even meager home sales could benefit certain lenders in Spain. But there are concerns that building more homes will drive prices down further, compounding the problems of the housing market, and by extension, the banking sector.

Since its property bubble burst in early 2008, the Spanish financial sector has been dogged by fears that it has put off doing a deep clean of the estimated €176 billion ($224 billion) in troubled assets sitting on its books. Banks have set aside funds to cover about a third of that amount.

The Bank of Spain has forced a wave of bank consolidation and recapitalization, resulting in new entities like Bankia, created by the forced merger of seven regional savings banks. Over the past two years, Spain has injected a total of €22.3 billion into its banking sector, from the state or its deposit guarantee fund, and dodged the market cross-hairs as concerns about euro-zone debt shifted to Italy.

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