Across the Costa del Sol, the visiting summer hordes of Brits and Germans have long since gone. But for locals, including Spain’s large population of ex-pats, there is little time to enjoy the tourist exodus. Instead, very real concerns remain about how the country’s property market – and indeed wider economy – will hold up.

The good news is that the ominous warnings back in April that Spain’s housing and commercial property markets were heading for an apocalyptic crash have not materialised.

Nor has there been any marked impact on the country’s banking system. So has Spain escaped the house market storm that has broken in America and now threatens the rest of Western Europe?

The fears were real enough. Valencia builder Astroc saw its shares plunge by two-thirds and rivals were similarly hit as investors took fright. Spanish house prices have tripled over the past decade, with the boom most intense on the southern coast.

This overvaluation is more extreme on some measures than in any other major industrialised country.

As interest rates fell, the prospect of a second home in the sun became increasingly tempting. And Brits have been among the most assiduous buyers: they are thought to account for an estimated 250,000 properties.

A fifth of all housing in Spain has been built in the past 10 years, as the construction and development boom roared on; last year more than 800,000 homes sprung up, beating France, Germany and Italy combined, leaving a glut of property overhanging the market.

But while this may be Europe’s sunspot, it now faces a frosty winter as the signs point to a worsening slowdown. Figures last week showed consumer confidence in September falling to an all-time low, triggered in large part by sharp increases in mortgage costs as the European Central Bank (ECB) pursued interest rate hikes.

And two separate reports on the housing market suggested that prices fell in the third quarter – the first decline since 1998.

Around 95% of mortgages in Spain are variable rate and, what’s worse, linked to 12-month Euribor rates that have spiked with the global credit crunch.

Any hope of a strong upturn in demand over the next year looks forlorn. Mortgage rates in September for new and existing borrowers are around a 100 to 112 basis points higher than a year ago.

New lending to households for house purchase by banks and credit institutions fell at an annualised rate of 10% in July. Further weakness is expected in the coming months.

All this is a further discouragement for builders, as house starts are set to fall further. Says UBS economist Stéphane Deo: “The situation is on a knife-edge. Consumers are highly indebted, mortgage rates have risen and foreign demand will likely wane in the near term.

“The question on everybody’s lips is whether or not prices will decline sharply from here.”

An even more sombre view comes from economists at Lombard Street Research, who note: “There is one puzzle in all this, a dog that has not yet barked in the night-time. Where are the Spanish banks?”

Spain, they point out, has had the biggest housing bubble in Europe. And its banks have been extremely aggressive, both in domestic lending and securitisation of loans, and in financing acquisitions by Spanish companies overseas.

It is likely, they warn, that Spanish banks will begin to report what may turn out to be quite substantial problems.

It is this dimension that makes the economic data from Spain of keen concern to officials in Brussels. A bust at the heart of Spain’s economy may come to destabilise the whole of the eurozone.

Nicholas Sarkozy, France’s president, would revel in such an outcome. French businesses have bridled for the past year at high interest rates and the failure of ECB to respond to the continuing rise in the euro, with all the problems such a development has created for exporters.

Brussels will be particularly concerned at a sharp politicisation of the debate over the rise in the currency. Earlier this year, Spain’s central bank governor Miguel Fernandez Ordonez (pictured) made no secret of what he held responsible for the worsening crisis.

“The single monetary policy,” he declared, “has meant that excessively loose conditions for our economy have been almost continuous. A less relaxed tone would have been better for our needs.”

The tightening over the past year has been all the more painful as a result. According to a report by the central bank earlier this year, house prices in Spain were 35% overvalued.

Any prospect of an easing of ECB policy looks remote. But tensions in the eurozone are rising, and nowhere more so than in Spain as it grapples with the double blow of monetary tightening and a credit crunch.

For the banks at the forefront, this may prove the season when mañana finally arrives.

Source: The Business