Property prices must fall 23% for market to return to normality says new report

Spanish property prices need to fall by 23% to bring housing affordability back to its long term average, and return the market to normality, argues a new report out today from property consultants Aguirre Newman.

The report asks how much average Spanish property prices have to fall to bring the cost of housing in line with the long term average of 30% of household income.

Assuming mortgage financing of 70% for 30 years with a rate of Euribor (4.5%) plus 0.5%, for a property of 75m2 and a disposable annual household income of 21,259 Euros, the report concludes that prices must fall by 23%.

The report focuses on primary housing, so the conclusions do not necessarily apply to prices for second homes, especial in coastal areas. Second homes are a luxury that tend to suffer more than primary housing in economic downturns.

Whilst identifying over pricing as the main problem, the report also points out that the market is under added pressure from the credit crunch and falling consumer confidence as unemployment rises.

With the property market paralysed by high prices, Aguirre Newman expect a trend towards renting over buying, should property prices not fall.

To date renting has been an unpopular option in Spain, with less than 8% of households renting, compared to 35% in other European countries. Aguirre Newman recommends legal and fiscal changes to stimulate the rental market.

The report forecasts that rents will increase just above inflation, making rental property investments worthwhile with the right legal and fiscal changes.

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