SPAIN has between 700'000 and 1.1 million unsold homes, an amount that will drag on a recovery in the housing market as prices will probably keep falling in 2011, the Bank of Spain said. “We will see a process of gradual absorption of accumulated excess supply, which will be slow and mean that housing investment will not contribute to the growth of activity in the near future,” the banking regulator said in its monthly economic bulletin published yesterday..

While new-home construction soared during Spain's property boom to 750'000 units in 2007, it dropped to 137'000 in the 12 months through September, a figure that probably won't increase much anytime soon, the Bank of Spain said.

Home prices will likely keep falling because of tax changes, the regulator said. A tax incentive for house purchases expires at the end of this year.