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The Bull market may be over

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Minister calms worries in Spain - 8 May 2007

Spain's Economy Minister has sought to quell anxieties about the stability of the country's property market...

Pedro Solbes told the Senate he was not concerned about the state of the market, despite the fact that construction, property firms and banks they have borrowed from lost more than €2 billion (£1.36 billion) in market value and pulled the IBEX, Spain's blue-chip index, down 2.7 per cent.

The Madrid stock market remained stubbornly low. The construction sector was down a further 0.5 per cent with only two of the seven stocks showing a rise, and construction materials dropped nearly 2 per cent. Real estate stocks lost as much as 5.4 per cent but banks held firm.

Mr Solbes pointed to areas of the economy that are performing well. "Are we in a worrying situation, in general terms? My thesis is that we are not, because family income is consolidating, there are good prospects for employment," he said.

He did acknowledge that Spain had felt the impact of steady interest rate rises by the European Central Bank (ECB). Rates are currently at 3.75 per cent, after seven increases since a record low of 2 per cent in December 2005.

Market heading for a ‘soft landing’ rather than a crash

Mr Solbes' remarks are the second intervention from a senior figure aimed at dispelling worries. Miguel Angel Fernandez Ordonez, Governor of the Bank of Spain, said yesterday that he believed the property and construction industries were heading for a soft landing, rather than a crash.

Fears that the Spanish property bubble might soon burst have been gathering pace over recent days.

Astroc Mediterraneo, a Spanish builder of holiday apartments, has been hardest hit. Shares have sunk 64 per cent in the past week, after an auditor's report released last week showed that Enrique Bañuelos, the Astroc chairman, had bought property from his company worth 65 per cent of annual turnover. The massive share sell-off that followed has been seen as the trigger for yesterday's market dive.

In addition, a government report last week showed that house prices in Spain increased by 7.2 per cent in the year to March, compared with an average annual rate of 15 per cent since 1999, buoyed by the holiday home market and an influx of immigrants.

The rate, which reached an 18.5 per cent high in late 2003, is expected to slow down further, to between 3 and 5 per cent by the end of the year.

Fragmentation of the domestic market

Sarah Dodgson, managing director of Marbella-based Hermosa Homes Spain, told Times Online that the big hit on the markets could be attributed in part to overpricing and heavy borrowing to fund mergers in the construction industry.

She also pointed to the fragmentation of the domestic property market in the country.

"The face of the traditional Spanish real estate market has changed beyond recognition," she said. While people in Spain once tended to move house less because of the high cost of buying and selling, trends were changing. People were beginning to leave their family homes earlier and single Spanish women were bringing their own independent buying power to the market, she said.

She added that as the market in Spain had matured, banks, faced with a rush of borrowers, had over-stretched themselves.

Even in Marbella, perennial favourite among expats, the current climate is a buyer's market. Ms Dodgson said prospects were less certain for British owners of Spanish property looking to sell.

"If they are sellers who have been involved in the speculative market then yes, there may be cause for concern."

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