Spain hit by property crash fears as boom cools

A broad sell-off of construction and banking stocks last week stoked worries that millions of homeowners, including some four million foreigners who own property in Spain, mainly from Britain and Scandinavia, will lose money.

The trigger for the fall in stock prices was the collapse of shares in real estate group Astroc after an auditor’s report said the firm’s 2006 profits were due in large part to the sale of assets to the company’s chairman.

Astroc, which was floated at 6.0 euros a share last year and reached a peak of 75 euros in February, closed at 14.84 euros a share on Friday, having lost more than 50 percent over the past week.

The stock’s plunge hurt sentiment for other property and construction firms like Inmocaral and Sacyr, which lost over 10 percent on Tuesday before recovering ground later in the week.

The construction sector accounts for 18 percent of economic output in Spain, the world’s eighth-largest economy, and a severe slowdown in the sector would likely have spillover effects.

The government has sought to calm jittery homeowners and markets, arguing an orderly slowdown in property prices is under way.

Economy Minister Pedro Solbes said the slump in Spanish property and construction stocks was a “major correction” but would not would affect the economy on the whole which expanded 4.0 percent in the first quarter.

“Are we are in a worrying situation? My thesis is that we are not, because family income is consolidating, there are good prospects for employment,” he told parliament on Wednesday.

The low interest rates which followed Spain’s membership in the eurozone in 1999 fueled a housing boom as Spaniards took out mortgages to buy homes for the first time or to trade up to a larger home.

Housing prices climbed an average annual rate of 15 percent between 1999 and 2005.

But the European Central Bank has increased interest rates in the eurozone seven times since December 2005 to 3.75 percent with further rate hikes anticipated.

This, combined with a high home ownership level which now tops 85 percent, has cooled demand for homes in Spain which the Paris-based OECD warned in January were overvalued by up to 30 percent.

Housing prices rose 7.2 percent year-on-year during the first quarter, their lowest increase since 1999, according to government statistics.

Builders, however, continue to build. They secured permits to build 800,000 homes last year, 200,000 more than estimated demand.

“The country is over-housed, households are over-indebted and the construction industry continues to churn out houses,” according to British economic research company Lombard Street.

The rise in interest rates has not just cooled demand for new mortgages. It has also helped increase bank loan default rates in a country where over 90 percent of buyers have variable rate mortgages at a time when household debt is well over 100 percent of disposable income.

BBVA, Spain’s second-biggest bank, reported Wednesday that its loan default ratio rose to 0.59 percent in the first quarter from the same time last year.

If debt levels increase further, homeowners will either have to sell their houses — which would lead to lower prices — or they will have to cut back on consumer spending, according to financial consumer’s association Ausbanc.

“If they restrict their lifestyle, and consume less, this will have a negative impact on gross domestic product, as consumption is a motor of Spanish growth,” said the assistant director of Ausbanc, Angel Garay.

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