Spain, a country that enjoyed impressive growth in real estate prices during the past 10 years, in a way that is similar to the growth pattern of Greece’s housing market, now appears to be in the grip of fears over a likely collapse of the property market. These fears have been fuelled by a sizeable liquidation of shares in construction firms and banks during the last few days, in the wake of signs that the European Central Bank (ECB) is preparing to increase its interest rates. In addition, excessive house supply and record-high mortgages are driving Spain’s property market into recession. Approximately 4 million foreign owners of property in Spain – mostly Britons and Scandinavians – are concerned about their properties losing value. A number of construction groups operating in Greece’s holiday house market have already received hundreds of real estate purchase requests by foreigners wishing to leave Spain, driven both by the recent negative market developments and excessive building activity in once idyllic locations along the country’s southern coasts. The tip of the iceberg has been the rapid drop in the stock market value of real estate developer Astroc, following an auditor’s report revealing that a major part of the high profits posted by the firm in 2006 came primarily from sales of assets to the firm’s president. This caused the company’s stock to plummet by as much as 50 percent, dragging down with the stock prices of several home developers and some construction firms. Losses were even incurred by the banking sector, on account of banks’ exposure in the sector through loans. Spain’s banks are highly vulnerable to housing market fluctuations, as 25 percent of their loan portfolios account for mortgages with an average repayment period of 26 years, compared to 12 years in the early part of the decade. An average loan has tripled to -150,000 in the past 10 years, with momentum coming chiefly from demand among economic immigrants, as well as thousands of Britons buying holiday homes in regions such as the Costa Brava and Costa del Sol. Naturally, the Spanish government tried to assuage fears, speaking of an imminent normalization of both the market and prices. Finance Minister Pedro Solbes explained the plunge in the stock market value of house development and construction firms in terms of a «considerable correction that cannot impact the Spanish economy as a whole, having recorded a growth rate of 4 percent in the first quarter of the year.» «Should we be concerned over the current situation? I believe not; family income is being consolidated and there are improved employment prospects,» Solbes said. In the period 1999-2005, the annual growth rate of home prices in Spain was as high as 15 percent, but demand was limited by several ECB interest hikes and the very high rate – approximately 85 percent – of privately owned properties. Nevertheless, home prices in the first quarter of 2007 were up 7.2 percent, though this figure was not as high as in the same period of 1999. There are many similarities between the home markets of Spain and Greece. Apart from a very high rate of privately owned homes, high growth rates in recent years had been primarily driven by low interest rates – now a thing of the past – which, in conjunction with the fact that prices have been out of the reach of most households, has placed great pressure on the market. In addition, the Greek market has been hit not only by the imposition of 19 percent value added tax on newly built homes but also by two successive readjustments of official property values. In order to avert a possible home market collapse in Greece, according to experts, construction firms should practise self-restraint with regard to the supply of new constructions, in conjunction with a freezing or in some cases even a lowering of prices. Oversupply is a major problem in Spain, working against the already poor market conditions. In 2006 alone, 800,000 new construction permits were issued in the country instead of the initially estimated 600,000. Oversupply is an issue stressed also by experts in the Greek market. According to Lefteris Potamianos, of real estate agency Search & Find, the problems are currently more acute in the northern suburbs of Athens, especially with regard to new constructions, as high prices are driving away the vast majority of prospective buyers. This explains why demand is now turning in the direction of existing homes, with most sellers prepared to reduce asking prices. Potamianos also believes that special care should be taken in the holiday house market in order to prevent a repetition of the Spanish experience in Greece.