Prices of Spanish homes, which lie at the core of the nation’s financial crisis, could plunge by another 25 per cent in a slump lasting up to four years, Standard and Poor’s warned last Thursday.

Correction is likely to take up to four more years

Spain’s real estate market crashed in 2008, throwing more than a million people out of work, exposing banks’ reckless loans, and sharply reducing regional governments’ income.

Since the first quarter of 2008, nominal house prices have declined 22 per cent, more than any other eurozone country except for Ireland, Standard and Poor’s said in a report.

“However, the magnitude of the decline has to be juxtaposed against the 150 per cent rise in prices in Spain between 2000 and the peak in 2008,” said the report by Jean-Michel Six, Standard and Poor’s chief economist in Europe, the Middle East, and Africa.

In the same period, eurozone home prices on average climbed by 60 per cent, it said.

“A look at each of the major trends affecting Spain’s residential real estate market – the housing overhang, household debt, housing price ratios, and unemployment – indicates that the correction is likely to take up to four more years,” the report said.

“In addition, price fundamentals show that a further 25 per cent drop in housing prices could be in order.”

Estimates of Spain’s stock of unsold homes range from 680,000 according to government figures, to 818,000 according to Cataunya Caixa bank, the rating agency said.

With annual demand at about 300,000 homes on average, and with about another 80,000 new homes being built every year, it should take four more years to balance supply and demand, it said.

Home mortgages, accounting for 75 per cent of all household debt, had multiplied 2.5 times between 2003 and 2010, it said, while the length of these loans grew from an average 12 years in 1990 to 28 years in 2007.

House prices fell by an average six per cent a year from 2008 to 2010 before slumping by nine per cent in 2011, it added.

But despite new mortgages drying up, household debt eased much more slowly, now standing at 81 per cent of total economic output compared to 87 per cent in June 2010.

That debt ratio would have to fall to the long-term average of about 66 per cent of economic output before house prices could steady, the agency said, estimating the process could take four years.

Just comparing Spanish home prices to the level of people’s incomes and the cost of renting, housing prices needed to decline by nearly 25 per cent to return to long-term averages, it said.

“The bursting of the real estate bubble is visible in Spain’s dire economic prospects,” said the agency, which tips an economic contraction of 1.5 per cent this year and 0.5 per cent in 2013.

It noted in particular that the construction sector slump led to the loss of 1.5 million jobs between 2008 and March 2012.

High unemployment also made it harder for people to pay their mortgages.