A research firm with a reputation for bullish reports on the Spanish property market has gone decidedly bearish in its latest report. Having been optimistic about the market’s prospects in recent years, Asesores Financieros Internacionales (AFI), one of Spain’s best known financial research firms, now forecasts that property prices will fall 30% by 2011, and that the market will not recover until 2012.

“Demand for housing will remain subdued until financial and economic conditions improve,” goes the report, pointing to the labour and credit markets as the main causes for the dire state of the property market.

With demand weak, residential construction will continue to fall, which in turn will depress the economy and demand for housing. Housing starts in the first quarter of the year fell to 30,000, compared to 200,000 in 2007. Expect a total of just 150,000 housing starts this year, a record low, and much of that social housing, say AFI.

Unfortunately, thanks to long lead times in the construction industry, the number of new homes completed this year will still be high, reflecting housing starts during the boom. 450,000 new homes will be finished this year, many of them to remain unsold and inflating Spain’s excess inventory of new homes, which AFI estimates at 830,000 by year end (on the low side compared to other estimates of 1 million plus). It will take 3 years to clear this glut, and prices will have to fall by 30%, argue AFI.

“We will have to wait until 2012 to witness a sustained recovery in residential activity,” says the report, forecasting just 300,000 housing starts that year, a long way short of the 900,000 started at the height of the boom. As a result, residential construction’s contribution to Spanish GDP will fall 28% in 2009, and 16% in 2010, reducing it to 5% of GDP, from 9% in 2007.

The recovery, when it comes, will be limited to the primary home market, driven by demographic demand for housing, say AFI. The holiday home market, concentrated mainly on the coast, will take longer to recover, and will play a much smaller role in future, say AFI.

S&P also gloomy on the Spanish property market

A recent report on European housing markets from the credit ratings agency Standard & Poor’s (S&P) also predicts Spain’s property market will remain in the doldrums until 2012. “The Spanish housing market is poised for an extended period of adjustment, with prices declining until 2012,” it said. S&P point out that countries with high levels of household debt, like Spain and the UK, have the biggest hill to climb towards recovery.