THE Bank of Spain considers that Spanish property prices are overvalued by about one fifth, but does not see a sharp correction in prices, the head of the central bank's research department said yesterday.
Spanish property prices have about doubled in five years, fuelled by favourable demographics and historically cheap lending.
The exact amount that property is overvalued is difficult to specify, but the available estimates would put it at about 20 percent, Jose Luis Malo de Molina, head of the Bank of Spain's research department, told a property conference.
The most likely scenario is ... for a progressive slowdown (in house price inflation)... without sharp corrections, he added.
Malo de Molina said that tax treatment which favours property ownership over rental was a distorting element which to a great extent explained the rising trend in Spanish property.
Studies show that the property ownership rate in Spain is about 80 percent, the second highest in Europe behind Ireland. One factor boosting the market is the large number of people in their 30s, the result of a 1960s baby boom, many of whom are buying property.
There is no doubt that a tax regime which provides a better balance between incentives for ownership and rental is desirable, he added.
Spain is not an isolated case. The International Monetary Fund warned last month that high house prices in many rich countries were in danger of a correction as central banks raise interest rates to check inflation, a fall that could ripple through the global economy.
The IMF said home values, adjusted for inflation, had surged by more than 50 percent since 1997 in Ireland, Britain, Spain, Australia, the Netherlands, and Sweden.
IMF Chief Economist Raghuram Rajan, in a newspaper interview published on Monday, called for vigilance over the housing market, but declined to call the current situation a bubble as bubbles are called that once they collapse.
Where Spain does however differ slightly from other countries is that property prices, and the market, is being kept alive by the continual increase in overseas buyers either buying holiday homes or relocating to various parts of the country.
Majorca has this year seen a rise in British home buyers of around 50 percent with properties on some of the new golf developments being nearly as much as 90 percent British owned.
There has been a shift in the foreign porperty market with the Germans selling-up and the British returning, but local government grants and funding are also helping first time Spanish buyers get their foot on the property ladder. The Spanish propery market is one of the few areas not hampered by the strong Euro against the Pound. With house prices still sky high in the UK, Britons are selling-up and either raising enough money to buy a smaller property in Britain and a house in the sun in Spain, or investing in a major new family home overseas.