The Housing Bubble in Spain

Spain was the site of one of the most massive real estate bubbles in modern times. From 2001 to 2007 home values increased by a mind-boggling 130%. As you might expect, this housing boom encouraged new construction, which increased employment numbers and helped the economy to grow immensely.

The buying continued even though experts warned that housing prices were overvalued by between 20 and 60 percent. Much of the buying was prompted by attractive mortgage rates and rising levels of immigration. At its height, more than 80% of residents in Spain owned their own home, which was the highest rate in all of Europe.

Of course, like all speculative bubbles this one eventually popped, and when it did it spared no one. In the first year of the crash, 2008, sales declined by over twenty- five percent. This was due primarily to the crisis in the mortgage market and the fact that they were no longer offering attractive loans. And for the first time in a long time rental property Spain became a popular alternative.

But the problems in the mortgage market are not entirely to blame. In fact, what happened in the Spanish housing market really was the perfect storm. Not only were there too many homes, but these properties were also incredibly overpriced. Then when the mortgage market went down housing sales dried up and new construction ground to a halt.

Unfortunately, the news didn’t get any better in 2009, in fact it got worse. Housing sales declined another forty percent, and this downward trend is expected to continue through 2010. At present, there are over six-hundred-thousand new homes unsold in Spain.

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