Overpriced property in Spain

The IMF calculates that property is overvalued by 20 percent in Spain

The International Monetary Fund (IMF) warned yesterday that a drop in the price of properties and investment in the residential property sector in particular could lead to recession. Although this is not the case in Spain yet the IMF has indicated that it believes properties to be overvalued in Spain by around 20%, a situation which is unsustainable. It also warned that Spain’s economy is one of the most vulnerable if there is a further weakening in the property sector.

A chief economist for the IMF, Simon Johnson, believes that innovation in the financial sector that has helped many people to purchase their own home over the last two decades has also contributed to making advanced economies vulnerable to weaknesses in the property sector.

Ireland, the United Kingdom, Holland and France are also in a vulnerable position due to weaknesses in their property markets at present.

Spain is also included in this group. Firstly residential investment is the second highest among advanced economies and constitutes 9% of GDP in Spain although at present this figure appears to be stable according to the IMF.

Ireland is the only other country with a higher figure than Spain’s with 12% of its GDP dependent on investment in the residential property sector. The second factor is the importance of the construction sector in the Spanish economy. Thirdly, the soaring price of properties in Spain over recent years is also another significant factor. According to Roberto Cardarelli, an economist for the IMF, prices in Spain are overvalued by between 15 to 20% which is twice as much as in the US. He also said that a weakening in this sector would have serious repercussions for the Spanish economy because it was much more vulnerable than any other advanced economy.

In the report due to be presented in Washington later this month the IMF also indicated that a weakening in the property sector would affect any economy that was experiencing a period of economic slowdown and that the effects would take anywhere between two to six months before they became apparent.

Monetary policy could help lessen the negative effects mentioned above which is why the IMF believes that central banks must pay more attention to developments in the property market and respond in an ‘energetic’ way to fluctuations in prices in this sector.

Next week the IMF will present its report on the risks to the financial sector and on Wednesday it will outline its forecast on economic growth. Yesterday Johnson spoke about ‘stagnantion in the US economy and ‘slow growth in Europe’. He also said that the price of property should be considered as one of the many key factors that influence economic prospects.