The massive real estate boom that Spain has experienced in the last decade was fueled largely by a strong demand within the country and a wave of immigration unlike Spain had ever seen before. Consumption and construction skyrocketed, and prices rose steadily with no apparent end in sight.
These factors, however, led to a current situation where growth is slowing, due in part to the braking of per-capita income caused by immigration and the imbalanced rise in property prices. Now, professionals expect prices to level out, and the hope within the industry – which has so far proven true – is that this process will be a smooth one.
Construction and immigration still constitute a crucial element of Spain’s economy; 16 percent of the country’s gross domestic product is fueled by construction and the still large numbers of immigrants continue to fuel economic growth on a wide scale. In fact, the general opinion is that immigrant workers are having a decidedly positive impact in Spain, thanks also to the large numbers of workers who are brought over by families that have already established themselves in the country.
The real change in the Spanish property market occurred throughout 2006, when the sector visibly began to slow down and, despite optimistic expectations, Spanish companies wasted no time in diversifying, investing in foreign real estate to protect themselves from a possible crash. Although the bottom has certainly not dropped out of the market, its face has definitely been changed and in 2007 office buildings, industrial developments and shopping centers are gradually playing a larger role than residential projects.
Another factor that has acted as a brake on the market is the high level of interest rates, which is a result of the former boom in prices. These prices are expected to continue slowing in their rate of growth throughout 2007. Last year, prices rose by 9 percent; 3.5 percent less than in 2005 and 8% less than 2004.
The first quarters of 2007 show a 7% year-to-year growth in property prices. Despite this, housing prices more than double the rate of inflation, while the goal is to bring them within the range of the CPI (Consumer Price Index). These factors, among others, all point to a continuing slowdown in the growth rate of prices.
The situation is becoming increasingly difficult for Spanish families as the level of debt increases. Although per capita net worth has grown, average debt surpasses the 100 percent income mark. If interest rates keep rising, it will be difficult for Spaniards to keep up with them.
On the positive side, Spain has 4 million immigrants and its unemployment level is at its lowest point in history, which shows that it’s able to support the immigrant flow. Also, thanks to the country’s fiscal surplus, the deceleration in consumer demand will be able to be made up for through public spending.
