Goldman Sachs: Spanish property prices must go lower 3.0 out of 5 based on 4 votes.

While the thought of further price drops in the Spanish property market will send a cold chill up the spine of many, one industry expert claims values must go even lower if the country hopes to turn its fortunes around. Goldman Sachs has warned that real estate prices must decrease by a further ten per cent, despite the fact they have already dropped by 30 per cent since peak, the Daily Telegraph reported.

The global investment bank is calling for a fundamental restructuring of the country's lenders and claims Spain's banks are holding back progress.This comes after the deficit reduction plan was abandoned. A deal has been brokered between the European Commission and International Monetary Fund  to give Madrid to bring down the deficit below three per cent. It is hoped this will lessen the pressure placed on the economy and address Spain's substantial unemployment problem.

This is impacting upon the property market and the government has recently passed a law to prevent banks from repossessing homes. However, Goldman Sachs don't believe this is the way forward and the bank's economists Andrew Benito and Sebastian Graves explained to the newspaper: "Our preferred model values housing based on the relationship between rental yields and real borrowing costs. The current level is consistent with house prices falling by a further ten per cent to reach an implied equilibrium."

They added that the bank's decision to continue offering evergreen loans to risky borrowers is holding back recovery, making too much credit available to "unhealthy sectors". Nonetheless, the financial sector has undergone significant restructuring and the International Monetary Fund (IMF) is confident the country is on the right track."The clean-up of undercapitalised banks has reached an advanced stage, and key reforms of Spain's financial sector have been either adopted or designed," they said in report. Sareb was also praised for its progress in dealing with distressed real estate and finalising the transfer of assets with affected banks.



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