With 20% unemployment and tales of Britons who brought property in Spain only to become embroiled in legal disputes over land ownership or that their pensions could not sustain them when the pound slumped against the euro Spain has had a terrible recession. And yet, just as we’ve seen in the UK, the market seems to have managed to take the strain. In the second quarter of 2010, house sales in Spain rose by nearly 25%, driven mainly by growth in “second-hand” home sales

Yet there are estimated to be about a million empty new-build homes in Spain. Says the FT, “most experts say it could take another three to four years to absorb surplus stock.” And that’s despite a collapse in the number of homes being built, from 800,000 in 2006 to fewer than 100,000 this year.

But by and large, what’s propped up prices in Spain is the same as what saved the British property market from harder falls – interest rates being slashed.

How long can the market hold out?

So how long can this state of affairs last? The trouble is, while prices have held up, it’s been at the expense of market liquidity. Put simply, people aren’t moving home the way they used to. And first-time buyers are a rarity in Spain as well as the UK. Without first-time buyers coming on to the market, it’s hard to see where further price gains can come from. It might be cheap to borrow, but it’s not going to get any cheaper.

Indeed, the biggest threat to Spain’s market might be the fact that Spanish banks own so much of it. As Mark Mulligan notes in the FT, “after three years of bankruptcies, defaults, foreclosures, debt-for-equity and debt-for-asset swaps, and the winding up of several property funds, Spanish banks have become the country’s biggest landlords and property agents.”

The Bank of Spain reckons that lenders now have €60bn worth of land and property on their books. However, says Maharg-Bravo, “new rules will force banks to set aside provisions of 30% of the property’s value if they haven’t been sold after two years. This is a powerful incentive for banks to dump the inventory.” She estimates that roughly 175,000 properties are in banks’ hands, “not all of which have hit the market.”