Panic selling of stocks in Spanish property firms earlier this week could cause a drop in house prices and spell disaster for more than 70,000 Britons who own a home there, experts have warned.

Economists at Lombard Street Research said that the housing market in Spain is teetering on the brink of a crash.They said: “The country is over-housed, households are over-indebted and the construction industry continues to churn out homes.”

The fear come after months of speculation that the boom in the Spanish housing market could turn to bust.

Last year house price inflation in Spain fell by 5 per cent to 10 per cent year on year, according the Royal Institution of Chartered Surveyors (RICS). Some areas in the north of the country experienced hardly any price growth at all.

Overdevelopment of the coast has caused demand to weaken and prices in some areas to fall. A fifth of all housing in Spain has been built during the past ten years driven by tourism and the construction industry.

Spain has long been the destination of choice for Britons. However recent land scandals and the attraction of less expensive emerging markets have meant that demand from British buyers has declined in recent years.

Last year corruption on the Costa del Sol left British property owners fearing for their Spanish boltholes after homes were built illegally on protected land.

The Ley Reguladora de la Actividad Urbanistica (LRAU) - or land grab law - has also left some Britons out of pocket: the law can demand in certain cases that owners cede part of their land to the town hall while receiving as little as 10 per cent of the value of their property in compensation. In some cases owners have found themselves liable for the part of the cost of redeveloping what was their land.

David Stubbs, RICS senior economist said: "The growing troubles of the Spanish housing market provide a timely reminder that investments in foreign property carry significant risk. Just because house prices seem low in relation to the UK does not necessarily mean that they represent a good investment. Indeed, markets which have been fuelled by significant foreign demand, and have encouraged housebuilding levels that threaten to generate a glut of homes for sale on the market, should be of particular concern to Brits considering their investment options."

Useful links:

www.expatica.com - for British expats in Spain

www.spanishpropertyinsight.com - news on the property market

www.kyero.com - analysis of regional house prices

www.isutus.com - Spanish property portal

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