Consumer price inflation to hit 5% in the summer, driving down real house prices

When consumer prices go up, the real value of property falls correspondingly. With inflation expected to hit 5% by the summer the real value of Spanish property will fall even if nominal prices stagnate. But all the signs point towards falling prices in nominal terms too.

Consumer price inflation in Spain, at 4.2% in April, is already well above the European Central Bank’s target of close to but below 2%. The government forecasts that it will fall to 3% by the end of the year, and it is true that inflation fell in April, from 4.5% in May. However, surging crude oil prices are likely to turn the government’s forecasts into nothing more than wishful thinking. Several leading economists and financial institutions, for example the Savings Banks Foundation (Funcas), are now predicting that consumer prices will rise to between 4.8% and 5% by the summer if oil prices stay above 120 dollars a barrel.

With Spanish property prices thought to be falling by 10% or more in many areas, the real value of Spanish property looks like it could fall by 15% or more this year.