The inventory of unsold homes in Spain has just gets bigger, no small thanks to the building splurge of the last 5 years. There are now close to 1 million homes on the market, half of them newly built, according to a new report from Standard & Poor’s, an international ratings agency.

The problem is that Spain has been building more housing than it needs for the last 8 years, certainly far in excess of demand implied by demographic changes. The result is a substantial housing overhang.

With the Spanish property market groaning under the weight of this housing glut, the report also identifies another problem, namely falling demand for holiday homes amongst foreign buyers. British buyers, in particular, are being discouraged from purchasing in Spain thanks to the strong Euro.

Spain’s economic growth during the last decade came to depend on the real estate sector, which thrived on “cheap and abundant” credit. That era has now come to an end, and Standard & Poor’s warn that the Spanish economy is “especially vulnerable” to the credit crunch and a housing crash.

Bearing in mind that, in 2007, Spain’s construction sector generated 15% of GDP, and employed 2.7 million workers, the effects of Spain’s construction sector slump will be “extreme”.

Standard & Poor’s forecasts a “long and painful” real estate slump, accompanied by a “prolonged decline” in Spanish property prices.