Don’t panic – the Spanish property market is not in meltdown. What sparked the recent slew of doom-laden headlines was not the housing market going into freefall, but a fall in the Spanish stock market as jittery investors dumped construction stocks in April.

Shareholders reassessed the outlook for the property market, which is largely a domestic one, catering for Spanish buyers of primary residences. Share prices have been bullish for the past three years, but, despite the booming economy, rising interest rates and evidence of a housing slowdown triggered a correction.

According to figures released by the Spanish housing ministry, average property prices rose by 9.1% during 2006, down from 12.8% in 2005 and from almost 20% annual growth in the couple of years before that. So, a market that was boiling a couple of years ago is becoming tepid. Spanish Land Register figures reveal that overall house transactions fell by 7.5% in 2006 and, for two or three years now, there has been plenty of anecdotal evidence suggesting stagnant or falling markets in some of the areas popular with Britons.

So with the good times seemingly over, what does this all mean if you own a holiday home in Spain, or want to buy one? The biggest losers are short-term speculators who overextended to buy off-plan in the final years of the boom, thinking they could “flip” it and make a profit. In the same boat are those who have bought an average property in an overdeveloped area in the past three years, and anyone who didn’t do their homework and paid over the odds.

Losses may become more widespread if Spain goes into a construction-led recession. This is not impossible, given the extent to which its economic growth depends on the housing sector. A recession would hit domestic demand for holiday homes hard, pushing prices down. Even so, good-quality properties with foreign appeal would probably get off lightly, and the market would recover in due course.

Any Briton who bought an attractive property in a good area five years ago or more should not worry. Good capital growth means these properties should still fetch a reasonable return were you to sell now.

If you are really willing to do your homework, the market wobble could be a good time to hunt for a bargain – and now is the best time in a decade to drive a hard deal. Remember, smart buyers look at whether or not a property represents value for money, not just how cheap it is. This leaves a complex situation involving different regional markets.

COSTA DEL SOL

Buyer activity on the western Costa del Sol peaked in 2003 and has been falling since. “Prices are back to where they were two to three years ago,” says Mark Clifton, a partner at the Marbella-based agency IPP. But the picture is starting to look less bleak. With corruption being tackled and infrastructure improved, attractive properties in better areas are selling quickly for reasonable prices. You can find a two-bed flat in Elviria for about £220,000, or a two-bed townhouse in Marbella for about £465,000.

Inland, there is even a shortage of the fincas sought by affluent Britons. “Buyers now are savvy people with money, not the deranged investors with 100% mortgages of a few years back,” explains Barbara Wood, who runs the Andalusian branch of The Property Finders, a search agency.

Unfortunately, there is also a growing glut of flats in mediocre locations all along the coast. Their value is likely to fall. The same applies in all coastal areas of Spain that have been heavily overdeveloped.

MURCIA

High prices elsewhere drove buyers, especially investors, into the arms of Murcia’s developers. Prices then rose far too fast, and resale prices on many projects are falling in an effort to woo buyers. Flats that cost £102,000 two years ago, for example, now sell for £92,000, and an average three-bed villa is about £240,000, down from £260,000.

“Some developers haven’t built what British buyers want,” says Gordon Turnbull, of Blue Med Properties. “Prices rise and buyers expect more in return.” Too many properties are still being built, but high-end developments such as Hacienda del Alamo, a 550-hectare golf resort inland in Fuente de Alamo, should still buck the market trend.

COSTA BLANCA

Once a beautiful coast, the southern Costa Blanca, centred on Torrevieja, now resembles a concrete estate. Inland, it’s a minefield of illegal projects. If it’s not cheap, it’s not good value; and if it is cheap, then it’s just cheap. Prices for flats have stayed the same, but villas that sold for £130,000 in 2005 are asking £116,000.

The northern Costa Blanca is in better shape, especially the smart area around Javea, Denia and Moraira. The market is subdued but stable, and many vendors have given up asking silly prices. Flats are typically up 15%, and typical three-bed villas in Javea, which were about £270,000 two years ago, now cost about £305,000.

“Transactions are fewer, but there is still substantial interest in quality properties in good locations from a core of affluent buyers,” says David Mear, of VillaMia, in Javea.

COSTA BRAVA

Transaction prices have been rising gently in the past couple of years, more so than in most areas, but the growth is still weak enough to keep asking prices – which were sky-high two years ago – realistic.

There is a good choice of upmarket properties, and demand is driven by affluent foreign and domestic buyers. The cooler market means there is more room to negotiate.

“There are still some ridiculous asking prices around, but the chances of someone paying them are lower,” says Louisa Grundon, of the local agent PCI. A two-bed flat in Pals, now selling for £153,000, cost £123,000 two years ago; three-bed villas cost about £290,000, up from about £240,000.

MALLORCA

Prices here are comparatively high, but buyers are affluent and there is a large stock of high-end properties. In a rare display of enlightened thinking, the island’s planners banned development for a couple of years; it resumed in May 2004.

The market has cooled in resorts, but growth is still running at about 12%. A traditional village house inland, for example, would cost £225,000, compared to £177,000 two years ago.

“Buyers are better informed and vendors are more disposed to negotiate if they want to sell,” says David Novi, director of the local agency Novi Properties.

Mark Stucklin runs www.spanishpropertyinsight.com, an independent online consultancy. spanishpropertydoctor@ sunday-times.co.uk . What do you think? Post your views on the Spanish property market at timesonline.co.uk/ overseasproperty

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