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Madrid real estate developers on Thursday predicted sharp falls in house prices this year with an accompanying knock-on effect on jobs and economic growth.

At a presentation by the Madrid Property Developers (Asprima) of its outlook for 2008, the chairman of the association, José Manuel Galindo, predicted home prices would fall 8 percent this year and 4 percent the following year.

As a result, the construction sector is expected to shed 600,000 jobs over the next two years, pushing the unemployment rate up to 9.6 percent from 8.6 in 2007, as compared with a government forecast of 8.2 percent.

Asprima estimated the slump in residential construction would shave 1.3 and 1.1 points respectively off GDP in 2008 and 2009. As a consequence, GDP growth would fall to 2.4 percent this year from 3.8 percent last year and to 1.9 percent in 2009. The government's official prediction for 2008 is for activity to increase by 3.1 percent.

Before the full effects of the credit crunch unleashed by the U.S. subprime crisis and higher borrowing costs started to make themselves felt, the government was confidently predicting a gradual adjustment in the property sector. But a spate of recent information suggests something more appropriately described as a crisis.

The government has been targeting to bring house price inflation - which at the height of a decade-long boom was some years close to 20 percent - in line with consumer price increases. The consumer price index was up 4.4 percent in February.

According to property website idealista.com, existing home prices in the first quarter fell 0.1 percent in Madrid, 0.5 percent in Barcelona and 0.6 percent in Valencia.

Asprima expects 300,000 housing starts this year, down from a previous estimate of 400,000. This compares with levels of around 600,000 at the peak of the boom.

Galindo urged the government to adopt measures to stimulate the economy, given that the levels of activity in other sectors are not strong enough to absorb the jobs lost in construction.

He said the sector would be lobbying the administration for tax and financial breaks to absorb the current stock of 400,000 housing units following the lead of the United States when the housing crash emerged.

Asprima's presentation came just a day after the National Statistics Institute (INE) reported a 27.1-percent drop in home sales in the first month of the year.

Lending has almost totally dried up for property companies with an increasing number seeking court protection from creditors or having to ask lender to reschedule their debt.

The sharp correction in the housing market is also starting to erode government revenues. While the administration still booked a budget surplus this year of EUR 9.381 billion, equivalent to 0.84 percent of GDP, the figure was down 27.5 percent on the same period a year earlier.

The finance department attributed this to the "impact on the economy of the slowdown in the property sector and the high price of oil." However, it said it was too soon to predict whether this trend was likely to continue through the year.

The government has said it could fall back on the surpluses it has built up when the economy was growing strongly.


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