Bank of Spain warns on house prices
By Kevin Barnett, 09 Jan 2006
The risk of a sharp fall in house prices is increasing and could halt Spain's economic growth, the governor of the Bank of Spain warned.
The bank's governor Jaime Caruana said: "The longer the current high rates of house price inflation are maintained, the higher the risk of a more abrupt or disorderly correction in the future." He repeated the European Central Bank's claim that Spanish house prices are between 24 and 35 percent overvalued.
He added that household debt as a ratio of gross disposable income had doubled to more than 100 percent since the mid-1990s. "The Spanish economy and, particularly, its households are now undeniably more vulnerable to adverse developments, especially to a potentially greater-than-expected hike in interest rates.”
But the risk to banks of a sudden fall in house prices was minimal because default rates are now very low and banks' solvency position is comfortable. Spain's 12 consecutive years of economic growth have been largely fuelled by buoyant consumer spending and the construction industry.
Homes demand still exceeds supply
Despite this growth and the record number of house starts in recent years, the Governor revealed that demand for new homes exceeds supply and highlighted the fact that at 2.25 percent the key euro zone interest rate is still low for Spain, where inflation was 3.8 percent in December, but it is “expected to rise again this year.”
Alberto Linares of Mortgages in Spain said: “The demand is as strong ever for the quality and specification on offer with Spanish apartments and villas and for the Spanish lifestyle that is desired by so many British buyers. The real cost of buying with a low interest Spanish mortgage is probably zero when taking the inflation into account.
“The building specification of most developments aimed at the second homes market and the inbuilt consumer guarantees that come with them adds to the value for money attraction of property in Spain,” he added.