The international credit crisis combined with weakness in the domestic economy has brought the country's thriving market to a standstill
The real estate sector has been one of the main drivers of the Spanish economy in recent years, and it has enjoyed huge success as values have risen strongly in real terms over a long period. But the sector is facing a crisis which is likely to persist.
According to the International Money Fund, at the end of last year, residential investment accounted for 9 per cent of gross domestic product in Spain, compared with an average of 5 per cent in other advanced economies. Low or even negative real interest rates and a strongly growing economy helped drive the market.
Domestic demand for housing as the number of households increased was combined with huge numbers of foreigners seeking holiday or retirement homes in the sun, or just looking to start a new life away from colder climates in northern Europe. In recent months this has come to an end. The international credit crisis combined with weakness in the domestic economy to bring the boom to an end. The slowdown in the market has brought a slump in residential transactions which have fallen by 27 per cent in January to May this year compared with the same period last year, leaving a huge stock of unsold properties coming on the market.
The difficulties in the market were symbolised by Martinsa-Fadesa, the biggest real estate developer in Spain, filing for bankruptcy in July. Several other developers are in trouble, and have seen their stock prices collapse. In July, Spain's Economy Minister Pedro Solbes described the crisis as the most complex the country had ever seen.
The market collapse is not the only problem causing homebuyers to think twice about Spain. In recent years many thousands of properties have been built illegally without proper planning permission. Investors who bought them in good faith stand to lose their homes as the authorities crack down on illegal constructions. And in some parts of Spain, increasing water shortages mean that many developments may prove to be unsustainable. Nevertheless, according to official statistics and despite predictions, the difficulties in the residential market have not been reflected in a dramatic fall in prices. Nominal residential prices rose by 2 per cent in June over 2007, although in real terms there was a slight fall.
Despite the problems in the market, Banco Bilbao Vizcaya Argentaria (BBVA), one of the main mortgage lending banks in Spain, believes that there will not be a sudden collapse in values, but there will be a slow fall.