The Spanish housing market still faces the headwind of a relatively high level of bad debts.

The ratio of non-performing loans (NPL) in Europe ranges from a dramatic 42.22% of all loans gone bad in Greece, to just 0.44% of loans gone bad in Estonia. In a ranking of 31 European countries by the IMF, from the highest bad debt ratio with Greece number one to Estonia at the bottom, Spain is in seventh place with an NPL ratio of 5.4%.

Whilst the NPL in Greece is still calamitous after a decade of crisis, as it is in Cyprus (19.52%), the situation in Spain has improved significantly in the last six years, falling from 13% in 2013 to 5.4% now, as banks have written off bad loans and sold others to specialist investors.

The Spanish bad debt ratio is forecast to continue declining, though the recent soft patch the Spanish economy is going through could slow down the rate of decline.

Although the Spanish NLP ratio is one of the worst in Europe, it is better than Portugal (8..93%) and Italy (8.37%), to put it in perspective.

According to figures from the ECB, the Eurozone had a black hole of €587 billion in bad debts in Q1 2019, with an average NPL ratio of 3.7% for the currency zone, down from 8% in 2014.

The countries with the smallest bad debt problem are Estonia (0.44%), Sweden (0.49%), Norway (0.72%) and the UK (1.09%).

A high NPL ratio reduces lending in several ways. For example it increases the provisions banks have to make to cover bad debts, reducing the amount they can lend, and discourages lenders from taking on more exposure to a leveraged sector like housing. The overall effect is to create a headwind for the housing market.

With a bad debt ratio of 42%, the Greek banking system is basically bankrupt, and only continues to function thanks to support from the ECB, and an implicit bailout for savers, who would otherwise have all tried to take their money out of Greece.

Careless mortgage lending tends to inflate housing bubbles that then pop and turn into bad loans, as happened in Spain during the boom years. The challenge for lenders and regulators is to avoid a bubble whilst not throttling the market, but Spain tends to swing from one extreme to the other.