Spain was the only one of the four biggest eurozone countries not to see a contraction in its economy in the second quarter of 2008. That though was nothing to do with its underlying strength, and everything to do with Prime Minister Jose Luis Rodriguez Zapatero raiding the budget surplus to pour €38bn into a spectacular attempt to kickstart things. You can only raid the piggy bank once of course and in the fourth quarter of 2008 the Spanish economy will indeed see negative growth (for the first time in 15 years). Falling Spanish house prices are just one of the woes.

The reasons aren’t hard to see - joining plummeting Spanish house prices is the grinding to a halt of the property market, and the knock-on from that of a rapid contraction in Spain’s building industry - hitherto a pillar of the Spanish economy.  Other woes include cuts in car production (another major element of the economy) and of course there is now a monster budget deficit to cope with too.

But just how bad is the contraction in the Spanish housing market? Pretty dramatic, with sales down 31.5 per cent in 2008 quarter two, though that is still pretty healthy compared to the situation in the UK and United States. The problem for Spain, just like Britain and America, is that many people have been growing rich on paper, thanks to the grotesque inflation in their assets (property) rather than earnings or real money in the bank. Fine as long as it stays on paper, and if people manage to practice prudence while being paper millionaires then it’s a harmless fillip to the ego. But of course, just like Britain, people have been borrowing against these assets; remortgaging and mining the cash from their homes without ever realising their assets. Sell or stay put might be sound advice, but don’t borrow against a theoretical increase in value. The sad inevitability is that falling prices have plunged thousands into negative equity. Still not a problem if you don’t have to sell, but with the economy contracting, jobs going and interest rates remaining stubbornly high (and the bills for the excesses increasingly dropping onto the mat), many people are having to sell.

And as anybody will tell you, late 2008 is a buyer’s market. There are huge numbers of unsold properties competing for your euros, but there aren’t enough mortgages to go round, to fund them all. Something has started to give big time. The future looks worrying too. That budget deficit has to be repaid sometime, and that can only be done through increased tax revenues. The dream scenario is a rapidly reflating economy, with more companies in business and more people in employment, all earning more money and thus paying more in tax to rebalance the books. But as even the most Pollyanna-ish among us now recognises, we are merely at the start of three years or more of pain. Turnover and income are going to be dropping and that means the only way to balance the books is to increase the tax burden on individuals and individual companies - almost inevitably a further deflationary trigger. Things don’t look good at all for the Spanish economy - though if you have cash burning a hole in your pocket, it could be a VERY good time to start looking at rock-bottom Spanish property. The bargain basement is open. Click here to start your search for bargain properties in Spain.