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Spanish house prices could fall by 5 percent or more next year as the country’s 10-year real estate boom ends, research by investment bank Morgan Stanley suggests.
A 5 percent fall, followed by a period of stabilization in the real estate sector, is viewed as the most likely scenario out of three possibilities foreseen by Morgan Stanley analysts, all of which point to either the Spanish property bubble deflating or, in the worst-case scenario, bursting.
In the most pessimistic prediction, the investment bank foresees real estate prices plunging by at least 5 percent per year, every year between 2008 and 2010, causing construction activity in Spain to plummet by 70 percent. With construction accounting for 17 percent of GDP, such a sharp downturn in the industry would all but certainly cause a recession in Spain, further reducing demand for homes.
Following Germany's lead
The “hard landing” scenario suggests that Spain would follow in the footsteps of Germany, where house prices have been falling following the real estate boom sparked by reunification. In Spain’s case, the Morgan Stanley analysts predict the real estate sector could take at least a decade to recover.
In the most optimistic scenario, house prices will remain flat over the coming years, although construction activity will decline slightly until the current surplus of housing units are taken off the market.
Property prices in Spain increased by 7.2 percent in the first quarter of this year, the lowest rate of growth registered since the start of the current boom in 1998.
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