Spanish Property prices

Spanish Property prices

Since 1995 Spanish House Prices rose 200% in nominal terms (i.e. before inflation is factored in), and 110% in real terms (after inflation). When the increase is compared to other economic variables, like wages and rents, there is a strong argument that houses have become significantly overvalued… but by how much?

When you compare the ratios of Spanish House Prices to average wages, and house prices to rental costs, their long-run averages suggest houses could be 50% overvalued.

A look at the house prices to household income ratio suggests house prices may be overvalued by 30%.

Capital Economics believes the most important factor has been the fall in nominal and real interest rates since Spain joined the Euro. At present the average mortgage rate is around 5.5%, half its mid-1990s level. The mortgage repayments costs to earnings ratio suggests that house prices are overvalued by less than 20%.

Capital Economics have pencilled in a 12% fall by the end of 2009 and a further 3% in 2010. However they accept that there clearly is a risk that prices could fall by more than their forecast.
The economists believe commercial property is not dramatically overvalued - it would only need fall by 8% for yields to return to their 2001 rates. The economic downturn should only trigger a “fairly modest fall” in commercial property prices over the next few years.