Will it rain on house prices in Spain?

Spain has long been a favourite destination for those looking to invest in a second home or move abroad. Strong demand for property in Spain has driven house prices up, but is the bubble about to burst?

Sun, sea and sangria have always had an allure for us brits and when coupled with house prices that seem very reasonable compared to the UK, we have flocked to Spain in our thousands to buy that holiday home of our dreams.

Increasing interest rates

The switch from the Peseta to the Euro created a low interest rate economy in Spain that has boomed as its construction industry went into overdrive, building property on any land available.

It doesn't just happen in the UK, but in other countries too – rising demand for houses increases their prices and forces people to borrow more.

The debt burden in Spain is now one of the biggest in Europe, and its now starting to cause problems.

The once low interest rates are slowly creeping upwards and those who took out variable rate mortgages to buy their Spanish property are starting to feel the pinch.

The number of mortgages being taken out in Spain is starting to fall and demand for house purchases is slackening off. Prices are generally stagnating or even falling in some areas.

Too many houses

The boom in Spanish property construction resulted in more than 800,000 new houses being built in Spain in 2006. This is four times the number that were built in the UK last year.

The trouble is that more Spanish houses have been built than were sought by buyers so there is a glut of houses available on the market.

One of the largest Spanish property companies saw a fall of 60% in its share price when rumours that it had been buying its own houses as they were not being sold in the open market.

Another Spanish property company has reduced prices on its holiday homes by 25% recently in a bid to sell excess housing stock in saturated areas.

Over supply of houses and increasing concerns about debt can only send the Spanish house prices one way – downwards.

Should you be concerned

Whether you should be concerned about this situation depends on why you bought Spanish property.

The attractions of Spain have not changed, so if you have moved there for a long term change in lifestyle, then even a fall in the value of your Spanish house is unlikely to affect you in the long term.

It is the speculative investor or those who have to sell soon that are going to be affected by a fall in their property values.

For those considering to buy a property in Spain, it may pay to wait a few months to see what happens to the market. There may be bargains available in the months to come.

It might rain on Spain

As in the UK, the growth of the Spanish economy has been fuelled, to a large part, by consumer driven spending financed by increased personal debt.

A crash in property prices – and some say that Spanish property prices are over valued by 30% – could drive Spain into a recession as consumer spending is cut back and debt problems bite.

A switch from boom to bust would be highly damaging for the Spanish economy with long term implications for its prosperity in the future.

The long term effects on the Spanish property market can only be guessed at, but they don't appear to be rosy.

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