The risk of a sharp fall in house prices is increasing and could put a brake on Spain's robust economic growth, the Bank of Spain's governor said in a report on the bank's website.
"The longer the current high rates of house price inflation are maintained, the higher the risk of a more abrupt or disorderly correction in the future," the report, signed by Governor Jaime Caruana, said.
It repeated the central bank's existing estimate that Spanish house prices are between 24 and 35 per cent overvalued and noted that household debt as a ratio of gross disposable income had doubled to more than 100 per cent since the mid-1990s.
"The Spanish economy and, particularly, its households are now undeniably more vulnerable to adverse developments, especially to a potentially greater-than-expected hike in interest rates," the bank said.
But the risk to banks of a sudden fall in house prices was minimal because default rates are now very low, and banks' solvency position is comfortable, the report said.
Spain's 12 consecutive years of economic growth have been largely fuelled by buoyant consumer spending and the construction industry, which is working flat out to keep pace with demand for new homes.
At 2.25 per cent the key euro zone interest rate is still low for Spain, where inflation was 3.8 per cent in December, but it is expected to rise again this year.