Frank Øland, European analyst at Denmark's Danske Bank, has warned of the risks associated with Spain's imploding property market.
House prices in Spain dropped -4.2% in the last quarter of 2011, Øland said - the biggest fall ever. The challenge for the market is that there are still no sign of stabilisation in the country's housing market, and there is unlikely to be this year as the macroeconomic environment remains poor.
"The number of house purchaes is falling month-on-month as unemployment rises and the economy retreats. Vacancy rates are at a record high of 24.3% and the outlook is for recession throughout 2012. This makes it difficult to see what could stop house prices falling."
Øland said that the ECB's three-year loans to Spanish banks had helped. However, these loans were more likely to be used to prop up the banks themselves - such as facilitating bigger provisions for their mortgage losses - rather than increase the volume of mortgate loans in the market.
Should the market continue its downward spiral, then Spain faces a worst case scenario of forcing the country to look outside for help in funding its sovereign debt. This is because banks could be on the hook for several hundred billion euros in respect of the Spanish property market. Solving that will require new capital, which would probably come from the government.
Spain's sovereign debt ratio of about 70% of GDP is much lower than, for example, the Greek one, so there is room for more spending. But a loss of €100bn on the property market would equate to about 10% of Spain's GDP. That is a lot of money, but it does not make Spain into another Greece, Øland said.
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