House prices are 30pc overvalued, reports warns

23rd January 2007, Comments 0 comments

23 January 2007, MADRID — House prices in Spain are 30 percent overvalued, according to report released on Tuesday by the Organistion for Economic Cooperation and Development (OECD).

23 January 2007

MADRID — House prices in Spain are 30 percent overvalued, according to report released on Tuesday by the Organistion for Economic Cooperation and Development (OECD).

Spain is becoming increasingly vulnerable to a sharp fall in house prices, the OECD said in a report on the Spanish economy.

It added: "It is becoming increasingly uncertain whether this upswing in house prices can be sustained for much longer

"Such an adjustment could occur in an orderly manner, during which price increases would gradually moderate and stabilise at a more prudent level. However, a more abrupt adjustment in which prices would plunge cannot be ruled out."

A gradual fall in the Spanish housing market remains most likely, but even that would have a huge impact on the economy, by reducing consumer spending and hitting the residential construction sector.

The OECD said house prices in Spain have increased almost 130 pct in real terms since 1996, with only Ireland and the UK recording faster house price growth in the OECD area.

And although the rate of increase has moderated in the past year, it is still running at close to 10 pct a year.

Household indebtedness reached more than 115 pct of disposable income last year, up from around 45 pct in 1996.

This increased the vulnerability of households to further increases in interest rates, the organisation said.

The report urged the government to take steps to stabilise the housing market by phasing out the various forms of assistance to home ownership to reduce distortions in the property market.

Reducing Spain's inflation differential with the rest of the euro zone would also help stabilise the property market because it would lead to a rise in the currently very low level of real interest rates.

Narrowing the inflation gap should be one of the key priorities for Spain, the OECD said.

The report added: "The losses in competitiveness induced by this inflation problem would be particularly damaging in case of a weakening of domestic demand and if the recovery in the euro area proves to be weaker than expected."

[Copyright EFE with Expatica]

Subject: Spanish news

 

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