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Spanish property prices need to fall substantially before recovery is possible

A drop of at least 23% is needed to bring housing affordability back to its long term average and return the property market to normality, the report from property consultants Aguirre Newman says.

But the prices need to fall even further for second homes as these are a 'luxury' and will therefore not see a recovery before the primary property market, the report adds.

Whilst identifying over pricing as the main problem, the report also points out that the market is under added pressure from the credit crunch and falling consumer confidence as unemployment rises.

With the property market paralysed by high prices, Aguirre Newman expects a trend towards renting over buying, should property prices not fall.

Renting has been an unpopular option in Spain, with less than 8% of households renting, compared to 35% in other European countries. Aguirre Newman recommends legal and fiscal changes to stimulate the rental market.

The report forecasts that rents will increase just above inflation, making rental property investments worthwhile with the right legal and fiscal changes.

However some experts are predicting that a much steeper fall in prices is required with one talking in terms of a 30% drop and that the property glut will take 15 years to clear in some areas.

It is estimated that a million new homes are currently unsold. Figures from the Ministry of Housing suggest there are between 650,000 and 930,000 and Tinsa, one of Spain's biggest appraisal companies, is forecasting a surplus inventory of 930,000 new homes by the end of the year.

This makes the situation in Spain worse than in the US according to Professor José María Montalvo, of Pompeu Fabra University. It will take at least five years to clear the surplus, he estimates.

But in some areas it could take 15 years according to Professor Gonzalo Bernados of the University of Barcelona. He cites Les Borges Blanques, Alcarras and Figueres as areas that could experience a very slow recovery.

Developers confirm that new property is not moving. 'Nothing sells, despite the fact that we have reduced real prices by 30% over the last two years and by more on the coast,' said Félix Abánades, president of Afirma that has 450 unsold properties and 300 more under construction.

A lack of credit is one of the main reasons behind the lack of sales. 'Banks are refusing to subrogate the developer's mortgage for 40% of buyers. Buyers are being forced to back out of their purchase contracts because they can't get a mortgage,' said Abánades.