Prices in the primary housing market may still have another 25pc to fall

The shakeout in prices for primary housing is far from over now that Spain is also having to deal with a “salary shock”, according to Angel Serrano (pictured), head of Aguirre Newman, a real estate consultancy.

Spanish house prices had to fall when the bubble burst, having reached speculative levels in the boom. They have also been under pressure from a housing glut, credit crunch, higher taxes, and an economic crisis with 26pc unemployment. But housing affordability is still not where it should be, suggesting that prices have to fall further, or wages have to rise.

In reality, Spanish wages are set to fall, in what some are calling a “salary shock”, which will further reduce housing budgets in Spain. The European Commission recently proposed a 10pc wage cut to make Spain more competitive, and though the proposal got a chilly reception, there is no escaping the fact that Spain will have to go through an internal devaluation if it is to stay in the Euro Zone.

The effect of declining wages means that house price may still need to fall by another 20pc to 25pc (or more) to become affordable, argues Angel Serrano, head of Aguirre Newman, quoted in a recent article in the Spanish financial daily Cinco Días.

Talking implicitly about the price of primary housing in Spain, Serrano said that average house prices need to be around four to four and half years compared to the average annual income before tax, but currently stand at almost six years (5.7), according to the latest figures from the Bank of Spain. That means that house prices are still too high in relation to incomes.

For house prices to be in equilibrium, the housing affordability ratio needs to get back in line with its long run average, meaning that prices need to fall an additional 20pc, or wages have to go up. But given the pressure that wages are under, plus the fact that taxes on buying property have gone up, it is far more likely that Spanish house prices will fall further.

The Government recently eliminated tax breaks for home buyers, whilst VAT on new homes has gone up to 10pc, as has the transfer tax on resale homes in Valencia and Catalonia. In affordability terms, higher taxes have undone much of the impact of lower house prices. “All or part of the fall in house prices during the crisis has been absorbed by the end of tax breaks,” explains Serrano, quoted in Cinco Días.