Spanish property bubble

The Spanish property bubble is the collapsed overshooting part of a long-term price increase of Spanish real estate prices. This long-term price increase has happened in various stages from 1985 up to 2008. The housing bubble can be clearly divided in three periods: 1985–1991, in which the price nearly tripled; 1992–1996, in which the price remained somewhat stable; and 1996–2008, in which prices grew astonishingly again. Coinciding with the financial crisis of 2007–08, prices began to fall. In 2013, Raj Badiani, an economist at IHS Global Insight in London, estimated that the value of residential real estate has dropped more than 30 percent since 2007 and that house prices would fall at least 50 percent from the peak by 2015. According to Alcidi and Gros note, “If construction were to continue at the still relatively high rate of today, the process of absorption of the bubble would take more than 30 years.”

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. Banks offered 40-year and, more recently, 50-year mortgages.

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. In 2008, new constructions came virtually to a halt, but prices were initially relatively stable with sellers reluctant to offer large discounts. The national average price as of late 2008 was 2,095 euros/m2 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). 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).

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

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