The Economist writes about Spain’s real estate bust, but unlike in the US, the problem is with builders, not borrowers.

The market is dropping fast. Property fairs tout discounts of as much as 60% on new-built homes, or even “buy one, get one free” offers. “All the statistics show a fall,” concedes the housing minister, Beatriz Corredor. Yet pinning down just how big a fall is tricky. Tax-shy Spaniards do not always declare the true selling prices. The government’s main index, based on valuers’ estimates, shows a 1.3% nominal fall in the third quarter. Most think the true figure is far bigger. The IESE business school talks of prices of existing homes falling by 8%.

Private sellers cannot believe that their homes are losing value, according to Fernando Encinar, communications director at idealista.com, a property website. But developers know the game is up. Some deals are being struck at 20% below advertised prices, he says, a fact few developers are keen to broadcast. They do not want people writing off deposits on half-built homes and shopping around for something cheaper.

The huge number of homes still being built makes the outlook even bleaker. Cranes dot the skyline of Madrid’s outer suburbs, promising more pain. Spain has been churning out new homes at near-record rates. Figures for new but unsold homes vary from half a million to over 900,000; the number is rising. In July a five-year record 70,691 new homes were finished. Over the first eight months of 2008 429,711 new homes joined the glut.

Those reassured by the health of Spain’s banks have tended to look only at household mortgages. But these are not where the real problem lies. Loan-to-value ratios tend to be safely below 80%. And Spanish mortgages cannot be cancelled by dropping the house keys at the bank: security is provided by all of a borrower’s assets—and sometimes those of relatives as well. It is no surprise that most Spaniards do their utmost not to default.