Foros de la Plataforma por una Vivienda Digna

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Euro helps topple Spanish property

By Ambrose Evans-Pritchard
Last Updated: 1:20am BST 26/04/2007



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Fears of a property crash swept the Spanish stock market yesterday, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market.

Spain's biggest property group, Sacyr, fell 8.15pc, while developers Colonial and Inmocaral plunged over 11pc.




Valencia builder Astroc first set off alarm bells last week after the regional junta changed planning laws. Its shares have since fallen 62pc, but there appears to be no obvious trigger for the sudden switch from euphoria to panic on the Madrid bourse.

Enrique Banuelos, Astroc's president, said he had no idea why investors had turned on his company. "Astroc is just the same company it was in January," he said. The firm's value was then €9bn (£6bn), after rising tenfold since listing in June. It has now given up almost all the gains.

The gloom spread to Banco Sabadell and BankInter, which both fell over 5pc on concerns over mortgage arrears. Madrid's IBEX index closed down 2.73pc.

Low interest rates set by the European Central Bank have fuelled a housing boom since Spain swapped the peseta for the euro in 1999, but excess stimulus has now seriously distorted the economy.



The current account deficit has reached 9.5pc of GDP, a sign of extreme over-heating. Spain is now the second biggest net contributor to global demand after the US, far outstripping China, astonishing for a country of only 40 million still living in the shadows of the Franco regime a generation ago.

More than 800,000 homes were built last year, beating France, Germany, and Italy combined, leaving a glut of property hanging over the market. House prices have risen 270pc over the past decade to an average price of €276,000, but began to slow sharply late last year. Household debt has risen to 133pc of disposable income from 75pc in 1995.

Manuel Romera, director of Madrid's Instituto de la Empresa, said: "I can see a mortgage crisis building. We have a serious property bubble in this country and everyone is in denial; it's worse than the US." Re/Max International said it had cut prices by 25pc on holiday homes in saturated regions earlier this year. Some four million foreigners own property in Spain.

Miguel Fernandez Ordonez, the Bank of Spain's governor, blamed the bubble on the wrong interest rates caused by euro membership.

"The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous," he said. "A less relaxed tone would have been better for our needs." A report by the bank concluded that house prices were 35pc overvalued.

The monetary policy is switching rapidly from too loose to too tight as the ECB caters to German needs. Interest rates have risen seven times to 3.75pc since December 2005, hitting Spain with an "asymmetric effect" since 96pc of mortgages are on floating rates. Most loans in Germany are on fixed rates.

Spain could now find itself facing a monetary squeeze just as the economy swings from boom to bust, more or less the fate suffered by Britain in the ERM debacle of 1992, except that Spain has no way out.

Bernard Connolly, global strategist for Banque AIG and former head of economic research for the European Commission, said the country will face a brutal adjustment over the next two years - if it can remain in the euro at all.

He said: "Spain is going to face the very direst of economic circumstances: a cycle of recession, deflation and widespread private sector default - a depression in fact. This stock market slide is not just a 'correction'. It has a very, very, long way to go."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/04/25/cnspain25.xml