Spain has the largest property bubble in the world. Since 1996, Spanish median house prices, after adjusting for inflation, have risen 130%. That is the third largest increase amongst OECD economies. However, since 2000, Spanish houses prices have doubled. That is more than any other country in the western hemisphere, including Ireland and the UK.
Not only are prices extremely high, they have become totally unaffordable. The house price to income ratio is one measure of this. In Spain, the ratio is more than seven. In other words, on average, in Spain, peoples houses are worth seven times their annual pre-tax income. If you compare this to the USA where the median nation household income is around $48,200 and the median house price is $212,000, then the ratio is 4.4.
The supply of houses in Spain has also gone completely over the top. In 2006, 800,000 houses were under construction in Spain, more than Italy, Germany and France combined and just less then half the houses under construction in the USA (The population of the USA is nearly 5 times bigger than Spains).
In the USA, the construction industry makes up approximately 8% of the total labour force, however in Spain it accounts for 13% of the labour force and construction investment measures 18% of Spanish GDP.
In America, when the consumer gets into trouble, the Federal Reserve (Lender of last resort) simply cuts interest rates and attempts to stimulate the economy with cheap money. Spain is powerless to do anything like this as it must rely on the bureaucrats in Brussels who control interest rates for the EU and these are set mainly to the economies of Germany and France.
Now interest rates are rising and as the majority of Spanish mortgages are issued with adjustable rates, the consumer is much more sensitive to rate hikes than the American consumer.
So the potential for a drop in house prices and the Spanish stock market is significant. Banks are pulling money out of Spains housing market or at least tightening the criteria in which they lend which makes it almost impossible to raise funds for that property you dream of. If you have property and the need to raise cash is paramount, then equity release could be one viable solution in this tight and vulnerable market.