Spain's collapsing residential property market is still overvalued, banking experts have warned.
Goldman Sachs analysts said that house prices in the embattled European Union economy need to fall another 10 per cent, according to a Telegraph report.
They added that that would pose fresh problems for the country’s troubled banks.
Overvalued? analysts at Goldman Sachs believe the Spanish property collapse has further to go.
As well as claiming that Spanish property is still overvalued despite a 30 per cent collapse, the bank called for a restructuring of the country’s lenders.
The warning comes hot on the heels of dire news on the Spanish economy yesterday. The government said it expects the economy to contract by almost three times more in 2013 than it had previously forecast, forcing Madrid to extend its deficit reduction programme by a further two years.
Deputy prime minister Soraya Saenz de Santamaria said GDP would shrink by 1.3 per cent, up from its previous 0.5 per cent contraction estimate.
Spain obtained some leeway on its tough deficit reduction regime last week. The European Commission and the International Monetary Fund relaxed their austerity demands, giving Madrid two more years to meet deficit targets.
Figures this week revealed that Spain's unemployment rate rose to a new record of 27.2 per cent in the first quarter of this year, with 6.2million people out of work.
The latest dire unemployment figures from Spain also look set to pile pressure on prime minister Mariano Rajoy.
Half a million Spanish homeowners are already in negative equity and the government has had to pass laws to prevent banks repossessing homes.
However, Goldman economists Andrew Benito and Sebastian Graves said more homeowners could be at risk. 'Our preferred model values housing based on the relationship between rental yields and real borrowing costs.
The current level is consistent with house prices falling by a further 10pc to reach an implied equilibrium,' they said.
Spain's banks are holding back the recovery by 'evergreening' loans to unviable borrowers, they said.
'Too much credit is extended to unhealthy sectors with poor growth prospects, such as construction, and too little net new credit creation towards more growth-friendly entrepreneurial and export-oriented sectors,' they said.
'A willingness to call in existing loans to unviable businesses and extend new credit creation to businesses with better growth prospects is important.'
Bank lending is falling, Goldman said, but it needs to be withdrawn from bad borrowers and lent to promising businesses to drive growth.
Government and ECB policy have helping avoid a 'disorderly deleveraging by banks' that would have been more painful to the economy.
But policy is now preventing economic restructuring, the economists said. 'While progress is underway, the Spanish economy still needs a significant economic restructuring... Banks have a central role to play in this process.