Banco de España on property
The Banco de España has been a voice of independent opinion in recent years when it comes to the Spanish economy. That's a good reason to take note of their warnings on the property market (article in Spanish) - this is not their first warning, but stating that property is 24 to 35% overvalued should be sufficient warning to potential buyers.
Spain is not alone with its property bubble. An article in the Australian says that property is 25% overvalued and prices are likely to stay put for the next decade. Alan Greenspan gave his clearest warning about the property bubble in the US yesterday (9 June) - although he suggested that some markets were more heated than others.
The Spanish government has not really been able to tackle the housing problem successfully to date. They are trying to encourage the rental market, but have not changed the law. Owners are required to sign 5-year leases when renting property and are relatively unprotected if a tenant ceases to pay the rent.
Meanwhile, the tax incentives to buy remain, and the low interest rate environment allows people to take on large volumes of debt. The Government could do away with the tax incentives, phasing them out over a 4 or 5 year period, and reduce the property transfer tax on the sale of properties. This would help reduce the upfront costs on buying a property, which currently amount to 10% of the price, or more. A bit of pressure on the real estate agents might also reduce the commissions that they earn on selling property (sometimes well over 5%) . Somehow competition doesn't seem to do that, but perhaps it will in the future when it gets harder to find buyers.
Banks are also culprits, in my opinion, as they sign up young people to 30 year mortgages on 50 square metre properties. Now if they really had their clients interests at heart, they would only offer funding up to 70% of the value of the property, forcing people to bid below the asking price. In an overvalued property market they are putting their own capital at risk by lending above this threshold.
So many people believe that the prices won't go down. This provides a floor to the market, but sometime soon there must be a pause in the upward movement of prices - and the volume of construction. For the moment interest rates in Europe are staying flat, but one year, two years, three years out they could have doubled to 4%. Any shock in the economy and they might triple. Either way, there are alot of people who are locking themselves into long-term rigidity with 25 or 30 year mortgages with servicing costs that can only rise. Maybe not the best ingredients to build a dynamic economy in the 21st century. Where are the risk takers, the investors, the entrepreneurs...not the young Spaniards who stay at home or the ones taking on a lifelong mortgage.