The Organisation for Economic Cooperation and Development is warning that Spain is increasingly vulnerable to a correction in property prices. It estimates they are currently overvalued by around 30% and believes an abrupt adjustment with plunging prices would have very serious consequences, though it sees as the most likely scenario a moderate revaluation of prices.
The warning comes in the OECD’s latest report on the Spanish economy in which it expects growth to slow from last year’s 3.75% but stay strong in 2007 at 3.3%, going down to 3.1% next year. It predicts inflation will fall from last year’s 3.6% to 2.8% this year, rising back to 3.1% in 2008.
With rising European Central Bank interest rates boosting mortgage costs, the OECD is concerned that a sharp fall in demand for property could hit prices and builders. It feels the Spanish government should progressively phase out tax breaks on property purchases as one way of avoiding potential problems.
Spain’s economy has expanded for 13 consecutive years, based on strong domestic demand and immigration as well as rising employment.
Property has been a major engine of growth in recent years with prices having doubled in real terms since 1998 and the OECD report said the country’s overdependence on the construction sector for economic growth makes it vulnerable to any down turn in the market.