Credit crunch in the wake of the US subprime mortgage market crisis signals the end of the Property Bonanza

The appraisers' association Sociedad de Tasación said Wednesday that while the cost of a new home rose on average by 5.1 percent last year in Spain's provincial capitals, the increase in the last quarter with respect to the first six months of the year was only 1.1 percent.The biggest increases took place in Valencia, Almería and Barcelona where prices rose by over 8 percent. Prices fell in Segovia and Vitoria by 2.7 and 2.5 percent respectively. The average price per square meter of a new home last year stood at EUR 2,905.The most expensive city for new housing in Spain last year was Barcelona, where the average price per square meter stood at EUR 4,543. San Sebastián leapfrogged Madrid as the second dearest city in Spain.
One of the main reasons for the slowdown last year was higher borrowing costs. The European Central Bank has raised interest rates eight times from historically low levels since the end of 2005.The credit crunch since the summer of last year in the wake of the US subprime mortgage market crisis also caused banks to tighten lending conditions, further dampening demand for housing.
"If this does not resolve itself and the liquidity crisis persists, demand for housing could fall, which would have an impact on prices," the chairman of the Sociedad de Tasación, José Luis Estevas-Guilmain said.Estevas-Guilmain said a fall in nominal prices this year is unlikely, but added price increases below the rate of inflation could take place if credit restrictions remain in place.Commenting on the Sociedad de Tasación figures, Housing Minister Carme Chacón said house price inflation seems to be stabilising at round 5 percent, and expects this trend to continue until it comes in line with consumer price inflation. According to the latest available figures, consumer prices in November of last year were up 4.1 percent.The Housing Ministry was set up by the current Socialist government, which took power in April 2004, as a means of addressing the socio-economic problems thrown up by the property boom. Chacón noted that house prices then were rising at an annual rate of around 17 to 18 percent.Since then, the administration has put emphasis on government-sponsored housing whose prices are well below those of the free market. It has also been promoting the rental market in a country where over 80 percent of households own their own home, the highest rate in Europe.