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What Does Deflation Mean for Spanish Property?

spanish house prices real vs. nominal change to end 2013

Consumer prices in Spain fell 0.2 percent in March compared to a year earlier, sparking a flurry of speculation that the country may be entering a period of “deflation.”

Although it was only a one-month dip, the possibility of a prolonged downward trend in prices would send ripples through the entire Eurozone recovery. The European Central Bank targets an inflation rate slightly below 2 percent as a sign of a healthy Euro economy.

For Spain’s property market, the possibility of a turn toward deflation raises complex issues. Relatively high inflation in Spain in recent years meant that house prices fell even further in real terms than the nominal peak-to-present figures usually quoted, as illustrated by the chart above (data from Housing Dept./Fomento).

Peak-to-present, Spanish house prices have fallen 40 per cent in nominal terms, according to appraisal-firm Tinsa, but after adjusting for inflation since the end of 2007, the real price decline is more than 50 per cent country-wide, and closer to 60 pr cent on the coast, where foreigners tend to buy.

A modestly-high inflation rate is good for Spain. Although it is hard on the poorest in society and hard-pressed families, it also eats away at the real value of debt, a boon for a country like Spain with a high level of private debt, much of it mortgage borrowing taken on in the boom.

If prices were to start trending downward, it could hamper a property market trying to find its footing. Deflation is bad for a debt-laden economy with a shrinking population like Spain’s, and therefore bad for the overall housing market. It also makes property more expensive in real terms.

One dip doesn’t make a trend

But a one-month dip doesn’t represent a trend. For foreign buyers, a consumer price dip is hardly cause for concern. And there were other headlines this weekend that provided a more encouraging snapshot of the economy.

On Friday, Treasury Minister Cristobal Montoro announced that the public deficit as a percentage of gross domestic product was 6.6 percent for 2013. The government missed the target of 6.5 percent, but it was still below the 6.8 percent of 2012.

“This is a positive figure, more so considering it was a year of recession,” Mr. Montoro told reporters.

A real downward trend in the public debt would, in fact, be a positive sign for the economy. And there are increasing signs that the private debt markets in Spain are stabilizing, at the very least.

Meanwhile, Spanish builder FCC is expected to announce a deal with creditors to refinance 4.6 billion euro in debt, one of the biggest deals in recent years for Spain, Reuters reports. FCC was one of the companies hardest hit by the collapse of the construction market.

For foreign buyers, it may be fruitless to attempt to read the tea leaves of the economic indicators. British buyers, in particular, need to think more about exchange rates than the Spanish inflation rate. The exchange rate will have a much bigger impact on the price they pay.

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