The bottom has fallen out of the market for government subsidised homes after free-market house prices collapsed by 50pc.

“Real estate never lets you down,” (el ladrillo nunca te falla) was a common refrain amongst estate agents and gullible investors during the boom years, as Spain went overboard with property speculation. That mantra turned out spectacularly wrong, at least measured over the last seven years since the bubble burst. Property prices have fallen so much that free-market housing is now almost as cheap as government-subsidised social housing; in some areas it is even cheaper.

Spanish Social housing, known locally as Vivienda de Protección Official (VPO), is freehold property offered for sale with hefty subsidies to certain groups, but it comes with strings attached. Government subsidies mean that VPO should be significantly cheaper than free-market housing, but buyers have to accept restrictions on use and a minimum period of ownership. VPO is rarely in desirable locations, and the quality is take it or leave it. You wouldn’t buy it if you could afford not to, which is why its sale is restricted to groups with limited financial resources.

In the boom years VPO used to be half the price of free-market housing. In 2007 the latter cost 2,086 €/m2, whilst social housing cost 1,071 €/m2, a difference of 1,014 €/m2. By the end of 2013, the difference between the two had shrunk to just 364 €/m2, as the price of free-market housing collapsed by 50pc, whilst social housing prices remained unchanged.

Upside Down

In some areas, like Castile La Mancha, the differential has inverted, and social housing is now 100€/m2 more expensive than free-market housing.

Understandably, the bottom has now dropped out of the social housing market. With such a small price differential, or even a negative differential, buyers have little incentive to buy VPO, which tends to be less attractive, in worse locations, and comes with strings attached, like minimum ownership periods.

To make matters worse, developers have no incentive to build for this market. The situation is so bad the Government has had to change regulations to allow developer to convert social housing to normal housing, and sell it cheaper on the open market without price restrictions.

A recent report by Soledad Becerril, a public official responsible for consumer rights (Defensor del Pueblo) revealed there are some 10,000 empty homes on the VPO market, which she recommended should be offered for rent. The Spanish housing market will remain upside down until the free-market recovers, driven by an economic recovery, growing employment, and a return of mortgage lending.