Housing Market Slump `Unthinkable’ in Spain, Government Says

Sept. 18 (Bloomberg) — A residential real estate slump in Spain, where prices have almost tripled since 1997, is “unthinkable,” the top economic adviser of Prime Minister Jose Luis Rodriguez Zapatero said.

The solvency of the banking system and of real estate developers, as well as the unmet demand for new homes, will prevent any meaningful price erosion, David Taguas, head of the prime minister’s economic research unit, said in an interview yesterday at his office at the presidential palace in Madrid.

“To talk about severe adjustments or a meltdown in prices is ridiculous,” Taguas said in response to reports pointing to an end of the Spanish real estate boom. “That sort of crisis is unthinkable.”

The gains in housing prices are already slowing and excess supply may lead to a decline in prices, predicted Gonzalo Bernardos, an economics professor at the University of Barcelona, who expects a 20 percent drop by 2009. Home prices rose 5.8 percent in the second quarter from the year earlier period, the smallest increase in at least three years.

The Spanish banking system is also solid enough to withstand rising financing costs triggered by the fallout from the surge in defaults in the U.S. subprime mortgage market. A run on mortgage- lenders such as Newcastle, U.K.-based Northern Rock Plc or funding difficulties like those at Countrywide Financial Corp. in the U.S. are “unthinkable” in Spain, Taguas said.
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Rising interest rates have pushed home prices beyond the reach of many Spaniards.
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Still housing demand has been sustained by an economic expansion that has outpaced that of the euro region for more than a decade. The European Commission predicted on Sept. 11 that the Spanish economy will grow 3.7 percent this year compared with the 2.5 percent rate in the euro region.
- Source: Ben Sills, Bloomberg, Sep. 18, 2007