Vic, 28 Aug 2008. The rolling Catalonian hills of northeastern Spain are dotted with picturesque villas and the occasional finca. Tractors ply the windy roads through olive groves and rows of grapes – the traditional agrarian way of life still dominates. But the occasional tourist in a rented car from the city passes through, on the way to a summer villa or rustic country property. Foreign property investment has been strong trend in past years, but with recent credit problems in the US and a reported downturn in the Spanish market, is this tourist market still strong?

Long popular with UK and northern-European investors and holidaymakers, property in Spain has recently experienced a slump. An estimated quarter-million Spanish homes are owned by Britons.

With significant increases in the UK property market, due to lack of new construction, and low interest rates in Spain, these Iberian properties have long been attractive investments for Brits. This has fueled a property bubble in Spain that burst around the end of 2008’s Q1.

This lead to a rapid unloading of Spanish property firm shares, with the over-housed nation’s property woes spreading to other sectors.

This property collapse has affected other areas of the Spanish economy. NTC Economics reported a record plunge to 40.9 – well below the 50 mark which divides contraction and growth. The survey was done in March 2008.

NTC chief economist Chris Williamson said, "In Spain it seems to be an all-round malaise. It was a dreadful survey."

The over-investment in the over-supply in Spain has resulted in the collapse of high-profile Spanish developer Martinsa-Fadesa. More than 12,000 buyers have made deposits to the developer – sometimes of more than 50% - to purchase property that will never be developed.

The very-real possibility of not getting their deposits back has caused panic from buyers – many in the UK. And current owners can only watch as the value of their homes plummet.

Even recent scandals and cheaper alternatives have not stopped this bubble from building. IN 2007, a corruption incident on the southern Costa del Sol meant that many owners risked losing their property when they found out it was illegally build on land that was protected.

The LRAU or Ley Rdguladora de la Actividad Urbanistica allows the government to take back land in some cases, while only offering as low as 10% compensation to the owners. Yet growth continued.

On the other hand, the Organisation for Economic Co-operation and Development (OECD) suggests that a decrease in unemployment could result in a property comeback. But this was only after they reported in 2007 that property prices could be inflated by as much as 30%.

Ultimately, all bubbles burst, and investors are brought back to reality. Investment slows, price corrections ensue, and supply and demand meet.



José O'Connor, EconomyWatch.com