Property market crash in the US spreads to Spain

The slump in Spain's house prices is beginning to bite into the whole economy, according to latest figures and official data from analysts and the government.

After almost a decade of boiling, fuelled by overseas demand for the country's sun-drenched villas, Spanish property market is declining. Some market experts see what is happening in Spain as the clear indication of US property crash spreading across the Atlantic.

Data released by the Spanish statistical office (INE) in March-end strongly suggest that the market has now taken a dramatic turn. In the 12 months to January, completed house sales were down 27 per cent on the previous 12 months. Sales of second-hand dwellings, representing more than half of total sales, fell 36 per cent over the same period, while sales of new houses were down 15 per cent. Figures were consistent with mortgage market as total lending to home buyers fell 28 per cent over the period.

In a recent report on European housing market, S&P cited Spain, Ireland and UK as the most vulnerable for a possible sharp decline in house prices. In case of Spain, the report recalled a warning by S&P in 2005 of the need for a cooling down in Spanish property market. The market kept boiling until a slump last year when house price growth slowed to three per cent from nine per cent in 2006.

The sheer demand for housing in peak years, especially by foreign buyers, led to huge supply through unprecedented construction activity. That helped fuel growth in the economy as a whole. Another consequence was keeping unemployment at low levels, and even opening the way for an influx of expat workers – mainly North African. A glut in house supply and weakening market means a sharp drop in reconstruction and rising unemployment, especially among migrant workers with more social and political implications.

According to S&P, the biggest concern now is the lag between housing starts and the most recent trends in the market, as reflected by house price inflation and the number of actual sales. Housing starts stabilised in the second half of last year, but at still very high levels (650,000 annualised). At the same time, house price inflation decelerated steadily.

The average number of housing starts in Spain over recent years totals 700,000 per year. Yet the population has only been rising by 600,000 per year. Even allowing for some catch-up earlier this decade, the supply of dwellings has outpaced demand (and obviously not every new addition to the total population requires a new home). Furthermore, UN projections indicate a slowdown in population growth in coming years, to about 500,000 per year. The share of residential investment to GDP increased to 9.3 per cent in 2006 and 2007, compared to an average for Spain since the early 1970s of 5.5 per cent and industrialised economies' average of around 6.5 per cent.

As mentioned before, part of the demand in the market was foreign, but that is not sustainable and Spain began to feel the punch.

As the booming property sector constituted a big share of gross domestic product (GDP), the decline now will wipe a considerable percentage of GDP growth. House prices in Spain are estimated to have increased by 190 per cent between 1997 and 2007, only Ireland and UK boomed the same or slightly more. The average GDP growth rate for the same period was 3.8 per cent. Sharp correction in the market, as expected, made many analysts downgrade the outlook for Spanish GDP growth to around one per cent this year, from almost two per cent previously.

Spiralling decline in property market started by the first quarter of this year, manifested in a decline of residential investment and not only house price fall. Last year the decline in residential building permits was at 11 per cent, and in the fourth quarter alone the number of permits slumped by 29 per cent year on year.

The Spanish Government is planning a spending increase on infrastructure in a bid to keep the construction sector afloat, but this might not absorb all employment shed by ailing residential investment. And most likely it would cut the government fiscal surplus of two per cent accrued during the boom and growth period.

Follow Emirates 24|7 on Google News.