Spanish vacation home boom may go bust soon

LONDON/MADRID: Vacation home prices in Spain, a leading indicator of Europe’s property market, may face a slump that’s worse than the real estate decline in the US, based on the loan terms banks are imposing on developers. Even UAL’s United Airlines, which was bankrupt last year, pays a lower risk premium on its loans. “Banks are imposing terms on real-estate firms similar to those for defaulted loans,” said David Malpica, who helps manage $5.6 billion of real-estate and distressed debt assets in Europe and the US for CarVal Investor in London. “It reflects the high volatility of real-estate assets.”

Property agents in Spain, Europe’s hottest housing market this decade, are likely to cut vacation home prices by as much as 10% this year, according to RR de Acuna & Associates in Madrid, which values real estate for about 40% of mortgages. A slowdown may have a “psychological” effect throughout Europe, said Tobias Just, an analyst at Deutsche Bank in Frankfurt.

Spanish house prices averaged e276,300 ($368,000) in December, according to Sociedad de Tasacion, a Spanish property company. They’re twice as expensive today as in 2000, beating growth rates in the UK and Ireland, according to figures from the European Mortgage Federation and Irish Life & Permanent.

British, Irish and German vacationers and retirees fuelled sales of 4 million homes to foreigners, according to the Vacation Homes Agency, an organisation in Madrid funded by developers. Construction made Spain the biggest driver of economic growth in the euro region this decade. Real estate spending by foreigners dropped 11% during 2006 to e4.9 billion, according to the Bank of Spain figures released last week. New mortgages sold to Spanish families fell by 10%, according to the Spanish Mortgage Association. Applications declined as the European Central Bank raised interest rates seven times in the past 16 months to 3.75%.