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If you think the UK鈥檚 housing market is on the ropes, just take a look at Spain鈥檚 鈥� flat on its back, punch-drunk and showing no signs of being able to stagger back up on its feet. The country鈥檚 precipitous economic downturn looks all the worse after 10 years of phenomenal expansion after which it become the world鈥檚 eighth largest economy. With annual growth rising to 3.75%, double the European average, Spain has enjoyed massive budget surpluses and created about 600,000 jobs each year, reducing unemployment from 25% in 1994 to 8.6%.

Driving this boom has been the Spanish construction industry; in particular, the housing sector. Despite having a population one-fifth smaller than the UK, the Spanish have built five times more properties than the UK during the past few years. Property prices soared, doubling between 2001 and the end of 2006, and rising by nearly 60% in the past two years alone.

But the good times are over. Since last year, house prices have fallen in most of Spain鈥檚 50 provinces, and the forecast is for prices to dip a further 8% this year. Spain鈥檚 four largest real estate groups have reported a 60% fall in off-plan sales and in January completed house purchases fell 27% compared with the same month last year, according to the National Statistics Institute.

But the really scary figures are those from the Bank of Spain, which show that building approvals and permits have fallen off a cliff since the end of 2006. At their peak, building permits were rising at an annual growth rate of 25%. By autumn 2007, their annual change was 鈥�30% 鈥� and they鈥檙e still plummeting. But although housing starts have been in freefall, housing completions are still at record levels, so a huge number of new-build properties are coming on to the market just as demand has gone cold 鈥� actually, frozen over might be a more accurate way to describe it.

In 2007, developers鈥� sales fell by between 40% and 70%, with the fall accelerating towards the end of the year. Taylor Wimpey鈥檚 Spanish division, Tayor Woodrow Spain, reported sales down 44% in 2007. Not surprisingly, many small and medium-size builders and real estate groups have gone bust and others look certain to follow. Meanwhile, it is reported that almost half of Spain鈥檚 estate agents have shut up shop.

So what went wrong 鈥� and should the UK construction industry be shaking in its boots at the prospect of sharing Spain鈥檚 fate?

One thing the construction industry here can鈥檛 be accused of is building too many homes. While the UK has barely expanded its housing stock during the past decade, Spain has gone on a construction spree, building about 800,000 new homes a year 鈥� more than France, Germany and Italy combined. Analysts believe there is demand for less than 500,000 of those, leading to a glut of supply.

鈥淭he fundamental difference between the UK and countries such as Spain and the US is gross oversupply,鈥� says Mark Ryder, Isis Waterside Regeneration鈥檚 chief executive. 鈥淭here may be pockets of overbuilding here, but our problem is too few properties.鈥�

Mike Farley, chief executive of Persimmon, said he thinks completions may go down to 110,000 this year 鈥� way off the 240,000 the government needs to meet its pledge to build 3 million homes by 2016. In contrast, even this year Spanish developers are set to build 300,000 homes 鈥� almost three times what the UK is likely to achieve.

More unnerving is the similarity in the pattern of soaring house prices and the subsequent plunge. The International Monetary Fund has warned that the recent slide could turn into a rout in European countries such as Spain, the UK and Ireland, where prices have risen far beyond traditional measures of affordability. It pointed out that prices were actually higher in several European countries, including Spain and the UK, relative to income, than they were in the US before its steep drop in prices. Earlier this month, the Halifax reported that UK house prices fell by 4.2% in the first four months of the year.

Few people will look at the forecast fall of 8% in Spain and think it couldn鈥檛 happen here. Indeed, some analysts predict a much deeper correction. 鈥淲ith the economy yet to slow significantly and the labour market likely to weaken as the economy loses steam, this housing market correction is only in its early stages,鈥� says Seema Shah, property economist at Capital Economics.

The Spanish coast was turned into a wall of cement resembling one big NCP car park

Mark stucklin, Spanish property Insight

Even so, the impact of the downturn in the housing cycle is likely to be worse for Spain than for the UK or other European countries, since investment in the construction sector there represents a massive 18% of the country鈥檚 GDP 鈥� in the UK, France and Germany that proportion is about 10%. In Spain, almost one in eight of the workforce is employed in construction and unemployment in the sector has risen by 53% in the past 12 months.

Asprima, the Spanish property developers鈥� association, estimates the sector will shed 700,000 jobs by the end of 2009. Investment in construction is tumbling 鈥� the Spanish construction association is forecasting a drop of 40% in activity in 2008. The knock-on effects on employment are already severe and most analysts expect them to get worse over the next year or two.

Nothing comparable is forecast for the UK 鈥� at least for now. But with Persimmon announcing that it has stopped beginning work on new sites because sales are so poor, Taylor Wimpey reporting volumes down about one-third in recent weeks compared with last year and Bovis reeling from a 70% slump in sales, it鈥檚 no wonder the sector is nervous. When business monitor Debtwire announced earlier this month that 150 estate agent branches were closing every week, the normally irresistible schadenfreude was eerily subdued.

The Brits themselves look likely to add to Spain鈥檚 woes. A combination of falling house prices here, a feeling that Spanish property still looks very expensive, and reports of corruption and poor quality buildings, are making the British very wary of investing in the country 鈥� in places such as South Costa Blanca and Murcia, British buyer activity fell by 80% in 2007. The Germans, too, are rolling up their towels and pulling out. Although UK housing doesn鈥檛 depend on a huge market in holiday homes, it does have a substantial investor market and this is coming under intense pressure 鈥� as was seen when buy-to-let giant Inside Track went bust last month.

Mark Stucklin of website Spanish Property Insight says part of the problem is that that in the boom years anyone could make money on housing, regardless of quality or honesty. 鈥淭he cowboys took over and developers had no incentive to understand their clients or differentiate their product,鈥� he says. The result: 鈥淭he Spanish coast was turned into a wall of cement resembling one big NCP car park.鈥�

And while things haven鈥檛 been nearly that bad in the UK, there is no doubt that many city centres are suffering from a proliferation of identikit investor flats. Isis鈥� Ryder says that for the Spanish, 鈥渋t was all too easy for developers to rely on a captive audience, producing sterile identikit products. But as long as you understand your market, you can win through.鈥�

For Ryder, the problem is not demand but mortgage availability 鈥� a crisis developers have no control over and about which he readily admits to being nervous.

Gaspar Lino, general manager of Marbella-based developer Peninsula, agrees: 鈥淭his is not a crisis of demand, it鈥檚 a crisis of oversupply made worse by the credit crunch. Banks have gone from one extreme of lending to virtually anyone to the other almost overnight.鈥� Lino considers it fortunate that his company has seen sales fall by only 40% and knows of other developers in the area struggling against a 90% drop.

But for Stucklin, the downturn is just what the doctor ordered: 鈥淭he economy in Spain became a bit of a property junkie in the boom years, so a dose of cold turkey to rebalance the economy is no bad thing,鈥� he says. 鈥淭he downturn might catch short-term property speculators with their pants down, but the rest of us will benefit from a healthier economy in the medium to long term.鈥�

Still, if construction companies in the UK do end up suffering as badly as their Spanish counterparts, they could always take a leaf out of their book and begin buying up Spain鈥檚 airports, mobile phone companies and banks 鈥�