THE current housing market boom in Spain is forecast to continue, despite the fact that house price rises are likely to cool over the next year, because solid economic growth and immigration inflows are expected to underpin a market that has seen prices soar over the past few years, a Reuters poll shows. A survey of 14 analysts in Madrid, Barcelona, London and Paris showed house price inflation falling by nearly half over the next year as higher euro zone interest rates and a slowdown in global economic growth bite. Medians in the poll showed annual house price inflation at a five-year low of 10 percent this year, then falling to 5.25 percent in 2007, well down from the peak of 18.5 percent in 2003. Yet analysts forecast the market, which has seen price rises of 160 percent since 1998, to be well supported by strong fundamentals. Ten of the fourteen respondents said the market had peaked, while four said there was more strength to come.
We expect a very soft landing for the housing market. Strong immigration and robust economic growth suggest the market still has support, said Javier Corominas at Oxford Economics. Spain's economy is expected to grow by around 4 percent this year, and then slow to 3.3 percent in 2007, but still well above projections for euro zone growth around 2 percent next year. The housing market has also been supported by a surge in immigration, which has quadrupled to over four million since 2000. Spanish banks reported that between 15 and 20 percent of mortgages sold have gone to immigrants, even though they account for only 9 percent of the population. Latin Americans are the leading clients for homes and mortgages, followed by those from Eastern Europe, North Africa and Asia. Retirees and other residents from Northern Europe and North America form a smaller, wealthier group. Above trend growth and historically low euro zone interest rates have also helped to boost the housing market over the last five years, stimulating growth in Spain's mortgage market. Yet with the European Central Bank determined to raise rates further in December to 3.5 percent to tackle inflationary pressures, and prospects rates will climb even higher next year, Spain's housing market may start to feel the pinch.
The only risk factor (to the housing market) is the increasing path of mortgage interest rates, said Lorena Mullor, chief economist at the Spanish Mortgage Association. She warned this could particularly affect those who bought a house in the last three years when prices were at their highest and rates at their lowest. However, Mullor and other analysts said that higher borrowing costs should not detract from further growth in Spanish housing. Yet growth should be slower, and ten out of fourteen see the market as overvalued by an average of 17.5 percent. Four said it was fairly valued. Liberalisation of the Spanish mortgage market could also provide a welcome boost to a cooling market. Spain plans to cut the cost of switching to cheaper mortgages, as well as offering a wider range of mortgage products, helping first time buyers to buy a property. Further liberalisation of the Spanish mortgage market could help sustain the current housing market boom, said Raj Badiani at Global Insight.