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Spanish house prices are “overvalued” by as much as 20 percent, the International Monetary Fund (IMF) states in a new report that warns that Spain will suffer more than any other European economy from the current global real estate slump.
“The slowdown in property investment will have more serious consequences in Spain than in any other European economy,” Roberto Cardarelli, one of the authors of the IMF’s World Economic Outlook said.
Many analysts now believe Spain is facing a full-blown real estate crisis. Though the overvaluation of Spanish property is not as great as in other countries covered in the IMF’s World Economic Outlook report, including the United Kingdom, Ireland and France, the most troubling factor facing Spain is the excessive contribution of residential real estate investment to the country’s economy, Cardarelli noted.
“Residential investment is the thing that’s really worrying. In my view it has to come down, because at current levels it is very, very high,” Cardarelli told reporters in a press conference at the IMF’s Washington headquarters.
At 9 percent of gross domestic product, residential real estate investment in Spain far exceeds the 6.1 percent average in developed countries, suggesting that a downturn in house prices in Spain will have a deeper and more prolonged impact on the economy.
“Given the uncertainty surrounding both the shocks hitting the economy and the effects of interest rates on asset-price bubbles, house prices should be one of the many elements to be considered in assessing the balance of risks to the outlook, within a risk-management approach to monetary policy,” Cardarelli said.
Ireland, the United Kingdom, Netherlands seen in worse state
Notably, the United States, which many economists now believe has dipped into recession, had house prices that were around 10 percent overvalued at the end of last year in the view of the IMF. It said the most overvalued properties could be found in Ireland, the Netherlands and Britain with excesses in the range of 30 percent given current interest rates, levels of demand and demographic trends.
"Countries that look particularly vulnerable to a further correction in house prices are Ireland, the United Kingdom, the Netherlands, and France. In these economies, it is difficult to account for the magnitude of the run-up in house prices on the basis of those countries’ fundamentals. Furthermore, a weakening housing market can also present a direct drag on growth from reductions in residential investment,” the IMF said. “Countries that witnessed the largest run-up in house prices also appear more vulnerable to this effect—in particular, Denmark, Spain, and France.”
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