Property prices don’t really mean much unless you compare them to incomes, to get what is known as the housing affordability ratio – the proportion of annual gross income that families have to spend on financing the purchase of a home. The housing affordability ratio in Spain has been going down, but only really thanks to artificially and unsustainably low interest rates. By other measures, housing is still significantly over-priced.

According to the latest figures from the Bank of Spain, the housing affordability ratio has fallen from a peak of 53% in Q3 2008 to 29% in Q4 2009. So Spanish families have to dedicate just 29% of annual income to paying for their home, below the 33% limit recommended by experts.

That’s great news for Spanish borrowers, at least for now. The problem is that the improvement is almost all down to record low interest rates, with Euribor currently around 1.22%, down from above 5% in 2008. As soon as interest rates start to rise, which they will, housing affordability could deteriorate rapidly.

Far from affordable

Another way of looking at housing affordability is to compare house prices to annual disposable income, which gives you a sort of price /earnings (p/e) ratio that ignores mortgage financing issues.

According to this ratio the housing market adjustment in Spain still has some way to go. It rose to 7.7 years at the height of the boom, and has now fallen back to 7 years. But that is a long way off the historical average of 4, which is where the ratio has dropped to in the US, where prices have fallen much faster.

It would have been better if more of the improvement in affordability had come from declining house prices, rather than lower interest rates.