Average Spanish property prices increased by 12% in nominal terms over 12 months to the end of March 2006, according to the latest figures from the Spanish Ministry of Housing. This raises the average cost of property in Spain to 1,888 Euros/m2, up from 1,685 Euros/m2 at the end of March 2005. With inflation in Spain running at 3.9%, the real increase in Spanish property prices over the latest 12-month period was 8.1%.

A real estate boom has been one of the key drivers, if not the main impetus, of Spanish economic growth over the last 5 to 10 years. This leaves the Spanish economy highly exposed to the real estate sector, and keeps the Spanish government awake at night worrying about the consequences of a sharp downturn in the property market – the ‘hard landing’ scenario. However, according to government figures at least, it appears that the Spanish property market is cooling down gradually, as the following graph shows.

This graph has two lines. The red line – the higher of the two - represents nominal Spanish property inflation, whilst the lower blue line plots real Spanish property inflation after adjusting for consumer price inflation.

For the sake of simplicity we will focus on nominal property price increases, ignoring the story of real property price changes. However, one should keep in mind that real annual property inflation in Spain is only running at around 8% today, rather than the 12% implied by the nominal figure.

The above graph shows us the annual rate of Spanish property inflation on a quarterly basis. So we can see that in the first quarter of 1998, when Spain’s real estate boom started, annual property inflation was running at just under 4% in nominal terms. In other words, Spanish property at the end of the first quarter of 1998 (31 March 1998) was 4% more expensive than it had been a year earlier. With some minor ups and downs, Spanish property inflation continued to increase every quarter until the end of 2003, when it peaked at 18.52%. Since then annual Spanish property inflation has been gradually declining, falling to 12% at the end of the first quarter 2006.

Where will prices go now? Most of the ‘expert’ forecasts for 2006 predict that Spanish property prices will ‘only’ increase by between 5% and 10% this year, in nominal terms (in real terms, if inflation stays at around the 4% level, this would represent real Spanish property price increases of between 1% and 6%). Looking at the above graph, it is not difficult to imagine a trend that takes Spanish property inflation to around 8% in nominal terms by the end of 2006.

As always, the increase in average Spanish property prices belies significant differences in property inflation between Spanish regions. Whilst the national average property price increased by 12%, the highest rise was 22.4% in the province of Ciudad Real (Castilla La Mancha), and the lowest was just 3.5% in Ourense ( Galicia). The following table gives all the latest prices, and 12-month property inflation rates for Spain’s Autonomous regions and provinces. Autonomous regions are in bold, and the areas popular with foreign buyers are highlighted. The table has been arranged in descending order of annual property inflation for the latest period.

It is interesting to note that, at least according to the government’s figures, most of the best performing regions, in terms of property prices increases, are also Mediterranean coastal areas where foreigners tend to buy property in Spain. Spanish Mediterranean costal property prices rose by between 8.6% in the province of Tarragona (Costa Dorada) and 18.6% in the province of Castellon (Costa del Azahar). Only two coastal provinces popular with foreign buyers – Alicante (Costa Blanca) and Tarragona (Costa Dorada) - had property inflation rates below the national average in the latest period.