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March 15 (Bloomberg) -- Spanish home prices fell the most on record in the fourth quarter as the euro area’s fourth-largest economy shrank and a reduction in mortgage lending crimped demand for property.

The average price of houses and apartments declined 11.2 percent from a year earlier, the most since the measurement began in 2008, the National Statistics Institute in Madrid said today in an e-mailed statement. Prices dropped 4.2 percent from the previous quarter and are down 21.7 percent from the market’s peak in the third quarter of 2007.

“The drop in the fourth quarter is just the start of things to come,” said Fernando Encinar, co-founder of, Spain’s largest property website. “Legislation passed by the government in February to push banks to provision for real estate will mean steeper declines in 2012 as banks lower prices to offload property.”

Prime Minister Mariano Rajoy is battling to turn around a slump in the real-estate industry as his government forecasts an economic contraction of 1.7 percent this year that will push the European Union’s highest unemployment rate to 24.3 percent. His government passed a decree on Feb. 3 forcing Spanish banks to make deeper provisions for losses linked to real estate in an effort to push down prices and boost sales.

Lenders, which have about 175 billion euros of what the Bank of Spain terms troubled property assets, will have to take about 50 billion euros in provisioning costs or capital charges under the government plan.

‘Banks Hoarding’

“We suspect house prices have fallen by more than 30 percent since they last peaked, but accept that some of the downward price adjustment may have been delayed by banks hoarding large portfolios of repossessed properties,” economist Raj Badiani at IHS Global Insight Inc. in London said in a note.

Financial institutions have foreclosed on 328,720 homes since 2007, according to Plataforma de los Afectados por la Hipoteca. Lenders have also acquired properties from developers to cancel debt and may have as many as 900,000 finished, unfinished and foreclosed homes on their books, according to Borja Mateo, author of “The Truth About the Spanish Real Estate Market.”

House prices more than doubled in the decade through 2007, before turning negative in the first quarter of 2008 and have since fallen by about 18.6 percent, separate data from the Ministry of Public Works shows.

“The lack of a credible benchmark house price series makes it difficult to predict the likely fall in house prices over the current slump,” Badiani wrote. “But we expect them to fall by 35 to 40 percent over the whole property market slump.”

Spanish home sales declined in January for an 11th month, falling by 26.3 percent, and residential mortgages decreased for a 20th month in December, dropping by 37.2 percent from a year earlier, according to the statistics agency. The INE started publishing changes in house prices in 2008 and its index of prices goes back to the previous year.

To contact the reporters on this story: Angeline Benoit in Madrid at; Sharon Smyth in Madrid at

To contact the editors responsible for this story: Craig Stirling at; Andrew Blackman at

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