Economist and property-market expert José García Montalvo argues that Spanish house prices are still “Stratospheric” in relation to incomes.

“House prices have not fallen enough, the adjustment still has a long way to go,” said García Montalvo, an economics professor at the Pompeu Fabra University of Barcelona, in a recent interview with the Spanish press.

The average house price in Spain still amounts to 6.4 years of household income, way above the 4 years that experts like García Montalvo say indicates house prices are reasonable. As a result, the adjustment is far from finished.

Credit Suisse (a bank) made the same point last year in a report ‘Spanish banks: The house price conundrum – A worrisome combination of factors’. The graph above, taken from that report, illustrates how far Spanish house prices rose as a multiple of incomes during the boom. Prides have come down since then, but not enough to bring them back into line with the long-term average of affordability.

García Montalvo warns that Spain is dealing with this crisis “the Japanese way,” in other words dragging it out for years. With sales of just 300,000 homes a year, a glut of 1 million homes and another 100,000 new homes built each year, “we have problems to last a good while.”

Four Phases of Decline

In another recent interview reported in the press he explained how Spain has passed through the four phases of market decline.

First there was denial, back in 2007, when the then Housing Minister Carme Chacón (and now potential presidential candidate) said Spain had “the best property sector”, whilst President José Luis Zapatero claimed Spain had “the best financial sector in the world”. For their part, developers were telling anyone who would listen that “nobody should expect house prices to fall.”

Then came the ‘blame someone else’ phase when the Government tried to blame the whole mess on the US sub-prime mortgage debacle.

Next came delusion, with the Government seeing “green shoots” of recovery in every abandoned building-site, whilst developers went around repeating to themselves that prices wouldn’t fall any further.

And finally, capitulation, with signs that the Government and banks have accepted defeat. Not the developers, however, who are still mumbling to themselves that prices won’t fall (just before they do).

Garcia argues that, considering disposable household incomes and Spain’s chronic population decline thanks to decades of low birth-rates, “house prices are still stratospheric.”

I would add that his argument is less relevant to holiday homes, whose prices have to be seen in terms of affordability in diversified European markets.