Spanish Property Bubble - Dynamics

Dynamics

House ownership in Spain is above 80%. The desire to own one's own home was encouraged by governments in the 1960s and 70s, and has thus become part of the Spanish psyche. In addition, tax regulation encourages ownership: 15% of mortgage payments are deductible from personal income taxes. Further, the oldest apartments are controlled by non-inflation-adjusted rent-controls and eviction is slow, thereby discouraging renting.

As feared, when the speculative bubble popped Spain became one of the worst affected countries. According to eurostat, over the June 2007-June 2008 period, Spain has been the European country with the sharpest plunge in construction rates. Actual sales over the July 2007-June 2008 period were down an average 25.3% (with the lion's share of the loss arguably happening in the 2008 tract of this period). So far, some regions have been more affected than others (Catalonia was ahead in this regard with a 42.2% sales plunge while sparsely populated regions like Extremadura were down a mere 1.7% over the same period).

Banks offered 40-year and, more recently, 50-year mortgages. Unlike Ireland, Spanish labour costs did not track house market rises. While some observers suggest that a soft landing will occur, others suggest that a crash in prices is probable. Lower home prices will allow low-income families and young people to enter the market; however, there is a strong perception that house prices never go down. As of August 2008, while new constructions have come virtually to a halt, prices have not had significant movements, neither up nor downwards. The national average price as of late 2008 is 2,095 euros/m2

Unlike much of the United States, Spain does not recognize mortgage loans as nonrecourse debt. Since most foreclosures only accounted for 60% of the loan, those evicted have large debts for property they no longer own.