MADRID – Spanish home prices increased in the fourth quarter of the year at their lowest rate in a decade and fell in 11 provinces as higher borrowing costs stopped a massive housing boom.

The Housing Ministry said Friday home prices in the fourth quarter rose by only 4.8 percent from a year earlier – just 0.6 more than the rise in the consumer price index (CPI) for last year of 4.2 percent.

"The government has achieved its target of bringing the increase in home prices in line with the CPI," Rafael Pacheco, the director general of the Housing Ministry said.

Pacheco predicted a further gradual drop in house price inflation this year.

While the housing surge may be over, the secretary of state for the economy, David Vegara, insisted there was little risk of a plunge in the market due to "solid" demand.

He said a series of demographic factors, such as a 10-percent increase in the population due to immigration and ongoing demand for second homes by foreigners, underpin the market.

Of the 11 provinces where prices fell from the third quarter, the biggest drop was in Zamora in the northwest where it was 5.1 percent. In the case of the other 10 provinces, the falls were less than 2.5 percent. They were offset by increases in coastal areas, with home prices rising 8.2 percent in the Mediterranean province of Murcia.

There was also a correction on the supply side, with the number of housing starts in the third quarter falling 5.2 percent to 602,500 in the third quarter compared with the same period a year earlier. The government estimates annual demand for housing of between 400,000 and 500,000 units.

The slowdown was also reflected in the mortgage market, where growth in lending eased to its lowest level in over a decade at 15 percent, down from a peak of over 27 percent in March 2006. The Spanish Mortgage Association predicted a further drop in growth of 6-9 percent

On top of would-be first home buyers being priced out of the market, the cost of servicing a mortgage has risen as a result of a series of interest rate rises by the European Central Bank since the end of 2005.

Banks have also become more leery about lending in the wake of the credit crunch sparked in the summer of last year by the US subprime mortgage market meltdown.

[Copyright EL PAÍS / Adrián Soto 2008]

Subject: Spanish news