The performance of the Spanish economy's most structural data in recent years paints a scenario of soft landing in the residential market in the short and medium term: slower housing demand, stemming from higher prices and slightly more restrictive financial conditions, will lead to real estate appreciation to slow significantly and all of this will bring a gradual downturn in residential building.

However, the most recent figures for the sector, corresponding to the early months of 2006, indicate that this gradual adjustment is coming to a halt increasing uncertainty about the pace and intensity of the future correction. In this context, there is a greater probability of a scenario which would lead to a hard landing in prices and quantities.

In the field of real estate development, since September 2005, there has been an increase in the number of projects to be developed and, in April 2006, the cumulative figure for the previous twelve months contemplated the start of more than 800,000 houses. A considerable increase in supply at a time when demand could fall would lead to surplus housing on the market and a slowdown in residential development in the medium term. In any event, current forecasts are pointing to gentle slowing to the 750,000 houses projected in 2006.

The figures for housing prices in the early months of the year show that their trend has also stopped slowing. The new figures question the slowdown in the market which started at the end of 2003: although prices presented a slightly slower increase in the first quarter of 2006 than in the preceding quarter, the analysis of the trend shows that this slowdown has come to a halt in the main self-governing regions. The continuation of the appreciation process in 2006 would increase the probability of a price correction occurring in the medium term, as is concluded in the box dealing with the real estate crisis indicator.

In this context, in the early months of 2006 credit granted for house purchase continued to grow at a rate of nearly 24%, in line with the performance this variable has been presenting since 2004. The buoyancy of financing was due to both the increase in the number of transactions and the increase in the amount of the average mortgage granted, and contrasts with the higher expense of mortgage financing. This shows that the change in the cycle of European monetary policy is being offset by other factors such as the following: the fact that monetary conditions in Spain are still a long way from being neutral, a macroeconomic environment which continues to be very favourable, the time lag existing between the decision to buy a home and taking possession of it in the case of new houses, and an extremely competitive financial market.

Lastly, this issue presents a set of reflections about the improvement in the efficiency of housing production in Spain in recent years and the conditions in which residential development has taken place, with a view to detecting its strengths in an international environment. The conclusion is that real estate expansion in other markets requires a certain command of more elements than those strictly related to the real estate development industry.