Spanish house prices ripe for further slide

Spanish house prices have fallen only modestly in the recession and remain acutely vulnerable to the massive stock of homes that banks have taken onto their books from struggling property companies and repossessions.

Spanish house prices fell just over 6 percent last year, government data showed on Friday, and have slipped 15 percent since a decade-old property bubble burst in 2007.

Talk of a turnaround is premature with the market still at least 55 percent overvalued, according to a study by The Economist. A prolonged recession and rampant unemployment weighs on any hopes Spaniards will be returning to the market soon.

"In Spain, property values have still not adjusted to the reality of the market. We think 2010 will be the year prices will adjust," said Javier Garcia-Mateo at property consultants Aguirre Newman.

Spain had outstripped most other European Union countries in gross domestic product growth since the end of the 1990s, but the global financial crisis exposed an economy built on cheap credit and an unsustainable rise in the property market.

BAILOUT OR BUST?

When the construction boom that fed the economic bonanza fizzled out, banks financing property development had to either allow the developers to go bust or bail them out by taking on unsold property.

Most banks chose the latter, which helped side-step an embarrassing spike in their non-performing loan ratios but piled a huge amount of empty housing onto their portfolios, further fuelled by rising evictions for non-payment.

The banks will struggle to liquidate this stock while the economy is still in the dumps and unemployment is close to 20 percent - the highest in the euro zone - without devaluing property prices further.

"They are still hoping that consumer spending picks up so they can sell their properties and the value of the properties on their balance sheets increases," said Paco Sanz at Spanish banking consumers' association ADICAE.

Any flood of bank-held property would further depress a groggy market which already has an estimated excess stock of around a million new unsold homes, similar to the much larger market of the United States.

HARD SELL

To complicate matters further many of the bank-held properties are in coastal areas or urban outskirts, making them a hard sell either locally or to foreign homeowners. British holiday home buyers, hard hit by a recession and a weak pound, have stayed away.

Banks have no doubt a further slide in prices is due.

"There are a lot of people with solvency problems or who are unemployed and so they cannot get a loan from the bank," said Lorena Mullor at the Spanish Mortgage Association.

Spain's Economy Secretary Jose Manuel Campa has said buyers would leap at house prices which are estimated to have returned at 2005 levels but prices are still too high compared to wages.