Spanish Property Economy Update

Summary: Not everything in the Spanish property garden is rosy, OECD issue a warning about Spain’s over-dependence on the construction industry

It’s not all good news in the Spanish property market at the moment - the Organisation for Economic Co-operation and Development have just released their comprehensive Economic Survey of Spain 2007 and within it they describe the housing market in Spain as having ‘dysfunctional aspects’ that require correction.

The Spanish property economy has seen rapid increases in underlying house prices and been partially responsible for increased household debt levels in Spain, and these two issues are tagged by the OECD as being potentially dangerous for macroeconomic stability.  Furthermore the OECD report goes on to suggest that prices in certain parts of Spain are over-inflated by as much as 30%.

Add to this data the fact that the European Central Bank are currently on an interest rate raising spree which in very real terms is making mortgages harder to afford, and that the OECD state that Spain’s economy has an over dependence on the construction sector, and there is further data to suggest that the Spanish property economy is not as healthy as it once was. 

If certain external shocks strongly and negatively affect the property market in Spain - such as a sharp increase in interest rates or a drop in demand from overseas buyers brought about by a turn down in their local housing markets for example - then Spain’s property market could come crashing down.

The conclusion that could be drawn from this data is that Spain is teetering on the brink of a housing market collapse…but what does all this really mean for the investment climate and also the outlook for all those who have holiday homes or retirement properties in the Spanish sunshine? 

Well, it’s actually not all doom and gloom.  The OECD cite spectacular employment growth as being positive for the property market as it has reduced unemployment levels and allowed for greater affordability to fuel domestic demand for housing; and the organisation advises it is far more likely that Spain will have a restrained revaluation of property prices over the medium term rather than a property price crash.

The organisation strongly suggests that Spain should do away with local property buyer incentives and that the authorities should make it safer and more attractive to rent property in Spain.  They claim that this will take pressure off demand for housing for sale, reduce the number of rental properties left standing empty, encourage national migration for employment and reduce pockets of unemployment and over the medium term naturally slow property price growth down to a more realistic level and allow for the natural readjustment of underlying property prices. 

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