COMPETITOR: New High Debt From Spain’s Property Boom

Household debt levels hit new record highs largely as a result of Spaniards being forced to take on increasingly bigger mortgages to finance the purchase of the family home, following staggering rises in property prices since the second half of 1996.

According to figures released by the Bank of Spain, the financial debt of Spanish households hit a record of €595.18 billion in 2004, equivalent to 74.5 percent of the country’s gross domestic product. The increase in debt over 2003 was 17.5 percent - about the same rise in house prices last year - to a level almost triple the amount in 1996 when the current property boom started to kick in.

That boom has largely been fueled in the past years by the cheapest money on record in Europe since World War II. While interest rates remain at rock-bottom levels - taking into account inflation, these have in fact been negative in real terms in Spain - and the job market remains buoyant, the underlying risks to the family budget and the economy as a whole would appear limited.
Increasing numbers of British buyers have forced price increases of off-plan properties and stand to benefit from the increased equity. Many are buying with “top-up” mortgages at almost half the rate of the rates levied on their UK homes.

Alberto Linares of specialists MortgagesInSpain.Net said that this is a fact increasingly noted by buyers of property in Spain. They have had a number of people reserving off plan properties that will be key ready after the new SIPPS rules allowing second homes overseas come in. MortgagesInSpain.Net has provided Spanish mortgages in principle to them as added comfort on their buying decision. The interest rate is almost half of what they are paying for mortgages on their UK homes.

But as Economy Minister Pedro Solbes warned consumers, the only direction European interest rates seem heading under the current scenario is upward.

The Bank of Spain has also repeatedly warned consumers to rein in spending and debt levels to prepare for that eventuality. The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have also highlighted the dangers to both the real economy and the financial system from sharp rises in interest rates and/or a plunge in house prices.

While the wealth levels of Spaniards (over 80 percent of whom are homeowners) have also increased as a result of the property boom, the rate of growth in their financial assets in the form of shares, investment funds, bank deposits and cash last year trailed that for debt at 9.2 percent.

Posted on: Spain

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COMPETITOR: New High Debt From Spain’s Property Boom

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