Despite the fall in Spanish property prices, Spaniards are still paying more than they used to for housing.

As you can see from the graph above, the housing affordability ratio, as calculated by the Bank of Spain (average property prices / average gross annual household income), has fallen from 7.7 years at the peak of the property boom to 6.2 years of income today.

Spanish families might welcome more affordable housing, but as the graph above also makes clear, housing is still much more expensive than it was before the boom, when it cost just 4 years gross annual income or less.

There are several reasons why the affordability ratio hasn’t improved more with falling property prices, including higher mortgage borrowing costs and lower household income.

None of this really applies to the cost of holiday-homes on the coast, where prices have fallen substantially more than the national average, and where foreigners with higher incomes than the Spanish national average tend to buy.

If your asking price is right you will sell your property in a day argues José Luis Jimeno (pictured above), Managing Director of Noteges, a property company.

You have nothing but your own unrealistic expectations to blame if your property doesn’t sell fast. That’s the conclusion Jimeno has reached based on his experience of this market. “The homes that have sold are 40pc on average below the price of other properties for sale in the area,” he recently explained in an article in the Spanish press.

So who is selling? Vendors who bite the bullet and drop their prices to be the most competitively priced on the market. They tend to be people who really need to sell, like divorcees, people who have lost their jobs, or people who have to relocate. It’s vendors like this that buyers should be targeting.

“You can have a home for sale for months or even years, but until you drop your price to where the demand is, you can forget about selling,” says Jimeno, whose organisation sold more than 6,000 homes around Spain last year.

Asking prices for resale properties fell 9.4pc in January compared to the same time last year, according to the house price index published by idealista.com, a leading property portal.

On a monthly basis, asking prices of homes in the idealista.com database fell 1.9pc to an average price of 2,045 €/m2.

It represents the biggest fall in asking prices since idealista.com started publishing the index before the crisis began in 2008.

On a monthly basis, prices fell the most in Castille La Mancha (-2.3pc), followed by The Balearics, Asturias and Andalucia (-2.1pc). Prices fell the least in Aragon (-0.1pc).

The Basque Country has the most expensive asking prices in Spain (3,312 €/m2), whilst Extremadura has the cheapest (1,305 €/m2), followed by Murcia (1,306 €/m2).

For more information on asking prices changes by region, province and city see the idealista.com asking price index (in Spanish).

All agree that prices will continue falling, the question is how much, and can the data be trusted?

Spanish house prices have fallen 18pc from the peak, according to the Government’s House Price Index. Is that enough? Not according to Isidre Fainé (pictured above), head of La Caixa, Spain’s biggest savings bank, who says house prices could fall 50 to 60pc peak-to-trough.

Fainé doesn’t have a crystal ball, but he does have the biggest branch network in Spain at his command. And unlike many other Spanish banks, La Caixa can probably afford the write-downs such a fall would imply. We have to assume he is well informed.

La Caixa are not alone forecasting more big falls. International rating agency Fitch say prices need to fall by 30 to 35pc peak-to-trough, or almost double what they have so far, before the market bottoms out.

Who am I to disagree with such illustrious names, but I have to point out an important flaw in all arguments that use the official house price index to show that prices haven’t fallen enough. The official index is more misleading than it is revealing. In reality average prices are down somewhere between 30 and 50pc, not the 18pc the index would have us believe.

This faulty index is a big problem for Spain. The index is taken at face value by international organisations and publications like The Economist, the OECD, the IMF, the European Commission, not to mention rating agencies like Fitch. Thus they all think Spanish property prices have only fallen 18pc and have much further to fall, when in reality the prices at which homes actually sell have fallen much more than that.

True, there is still a lot of over-priced property on the market, but what is a house price index supposed to show? Asking prices or sales price? The latter, of course.

The House Price Index published by the Department of Housing shows house prices falling 6.8pc in 2011, and 19pc since the peak.

Last week it was the appraisal company Tinsa’s house price index showing prices down 8pc in 2011. Now it’s the turn of the Government to publish it’s housing price index for 2011, showing a broadly similar decline of 6.8pc over 12 months to the end of December (red line above).

Both the Tinsa index and this one show an almost identical curve with a double-dip starting at the end of 2010 and price-falls accelerating in the course of 2011.

After adjusting for inflation (blue line above), Spanish house prices fell 9.6pc in real terms in 2011. So anyone with an inflation-proof income (the majority of Spaniards with indefinite labour contracts) saw the real cost of buying a house fall by 10pc last year, or more if you include the 50% reduction in VAT on new homes.

Prices fell the most in Aragon (-10.4pc), Madrid (-8.2pc), Andalucia (-7.8pc) and Catalonia (-7.7pc), and the least in The Basque Region (-3.1pc), Asturias (-2.7pc), and Extremadura (-2.1pc).

According to Fernando Encinar, head of research at the portal idealista.com, “there is no reason to think that anything is going to change in 2012.”

Of course you have to take all the official figures with a large pinch of salt. If the official index shows declines of 6.8pc, the reality was probably something between 10 and 15pc.

Soon to be published, and all that remains to be seen for 2011, is the official House Price Index from the National Statistics Institute, which should come out in the next month or two, and which tends to be used by the international press. Based on past form it will probably understate price declines more than any other index, which partly explains why so many articles in the international press say that Spanish property prices haven’t fallen enough.

Spain’s most reliable house price index fell 8.1pc in 2011, making last year almost as bad as the crisis year of 2008, when prices fell 8.8pc.

There is a clear double-dip in the curve (see above) with price falls accelerating again after staging a feeble recovery last year.

One of the reasons house price declines have picked up speed is because of the return of the credit crunch in Spain. The double-dip in house prices is mirrored almost exactly by a double dip in new mortgage lending.

Surprisingly, coastal areas where holiday-homes and much of the glut are concentrated finished the year better than other areas, with prices down 7.2pc over 12 months, compared to 9.1pc in cities and 8pc on the islands.

Some experts argue that popular coastal areas will recover before the rest of the market thanks to diversified international demand from comign from economies doing better than Spain.

The price of newly built property fell just 4pc in the course of 2011, according to Sociedad de Tasación, one of Spain’s leading appraisal companies.

The chart above shows the average price of new property in €/m2 (blue line) and the annualised change (bars).

With at least 750,000 empty new homes on the market, and the worst real estate crash in living memory going into its fifth year, there is no way on earth that new build values fell by just 4pc last year. Double it or more, and you are getting closer to the truth.

Vendors of resale properties dropped their asking prices by an average of 8.2pc in 2011, according to Idealista.com, one of Spain’s leading property portals.

In terms of the cost per square meter, the average Spanish home now costs 2,084 €/m2, down from 2,270 €/m2 a year ago.

“Price falls accelerated in 2011,” explains Fernando Encinar, head of research at Idealista. “Everything suggests they will continue falling in 2012, by how much depends on what the banks decide to do with their real estate assets: They (the banks) will be the ones to slow down or speed up the price adjustment, and private sellers will have to reduce their prices and expectations, led not only by the economic uncertainty but also by what banks do with their prices.” On the other hand, Encinar is confident the demand is there if the price is right, and if banks will lend.

Property prices fell in all of Spain’s autonomous regions, lead by La Rioja (-13.4%), Castille La Mancha (-13.2%) and Catalonia. Prices fewll the least in Galicia (-0.3pc), Extremadura (-3pc) and Cantabria (-3.2pc).

The following table summarises resale asking price changes by autonomous regions according to idealista’s database of properties for sale.

+ Idealista 2011 Asking Price Report (in Spanish)

After a small bounce earlier this year, the price of urban land has lurched down to levels not seen sine before 2004, according to figures from the Government (Fomento)

Land prices fell 11.1pc to 169.60 €/m2 over 12 months to the end of September, and 20.7pc compared to Q2.

According to these official figures, at least, Spanish land values have fallen around 60pc since the peak, as illustrated by the chart above. Other sources suggest that land values in many areas have fallen by much more, and by up to 100pc (or more) in the worst affected areas.

In towns & cities of more than 50,000 inhabitants, land prices fell 26pc over 12 months.

Land market collapse

There were 3,546 land sales in Q3, 17pc less than the same period last year.

The land market has collapsed by about 85pc since 2005, as illustrated by the following graph.

Juan Enrique Varona, a professor at the University of Cantabria, says prices are between 15pc and 20pc off the peak, and need to fall to 35pc off. “Prices have not fallen as much as they need to,” given the market situation he says. “Demand is very low,” whilst supply is “out of all proportions.” As a result, “we still don’t know what the market prices for housing will be.”

Angel Cano, a director at BBVA, one of Spain’s top-2 banks, says prices will fall between 5pc and 10pc over the next 24 months, but not to the same extent all over the country. Some areas might even escape falls.

Nicolás Llari de Sangenís, a director of property consultants CB Richard Ellis España, says that the housing market will take “5 years to return to normality, which doesn’t mean there are no good business opportunities now.” He sees the best opportunities as primary residencies in Spain’s main cities. He points out that “you have to be clear that not all properties are falling equally (in price). Banks won’t offer these financing terms for ever, so take advantage of them now.”

Ratings agency S&P say prices will continue downwards, with no recovery in 2012.

Carlos Ferrer-Bonsoms, Director of residential property for agents Jones Lang Lasalle, says prices have already fallen 35pc to 40pc since the peak, and could fall another 15pc in areas of over-supply before they bottom out. “There are many areas with over-supply where house-prices will fall and lenders will have to offer very good financing.” Prices will not fall any further, however, in some areas where there is a shortage of sought-after homes, for example parts of Barcelona and Madrid.

According to the international firm of auditors Ernst & Young “Any significant recovery in Spanish building activity looks far off, because house-prices are still probably over-valued and we expect them to continue falling for at least the next 3 years.” They believe Spain is already in recession and won’t start growing again until 2012.

Property prices in Madrid have fallen 44.8pc since the peak in 2006, according to a new study by Spanish estate agents Tecnocasa. Most experts agree that prices have fallen more on the coast than in Madrid, so the price of holiday-homes on the coast has probably fallen by 50pc or more.

On the subject of land values, Mikel Echavarren, head of Spanish property consultants Irea, does not expect prices to fallen any further because they have already reached zero. “The market for land has disappeared. There are almost no transactions between genuine investors. Land has reached a market value of zero, or even below.” Below zero means you would have to pay someone to take the land off your hands.