Property prices in Spain are likely to continue falling due to rising supply and weak demand, according to a new report.

A growing glut of properties is the main factor affecting the Spanish property market and even although the number of new units coming onto the market is slowing, supply still outstrips demand, says the report from Birmingham based construction, property and development consultants DBK.

New unit starts are down 45% so far this year, and forecast to reach just 200,000 for 2009 compared with 360,000 last year, and 760,000 in 2006, but it is still too much for the market to cope with.

The report also predicts a big fall in the number of property developers in business in 2010 and a sharp increase in property sales activity by banks. 'A big fall in the number of registered companies will be apparent, as a consequence of the present crisis in the sector,' says the report.

'We expect a prolongation of the present situation of very low activity in the residential sector, with more price falls for newly built homes, and an increase in the inventory of unsold property,' it adds.

The new legislation proposed that changes the way profits are calculated at the banks could result in them dumping large numbers of re-possessed properties on the market which will add to the glut.

'In response, developers are expected to continue marketing like hell with discounts and special offers, whilst coming under pressure from increasing competition from banks. Banks, for their part, are expected to increase their presence in the market, taking over more developers and mortgage repossessions,' said Mark Stucklin of Spanish Property Insight.

'Banks can offer better financing terms than developers, giving them a competitive advantage about which developers are up in arms,' he added.

He also points out that The Bank of Spain plans to introduce a new rule forcing banks and savings banks (cajas) to double the amount they write off when they own a repossessed property for a year or longer. 'This will give banks and cajas a big incentive to reduce their prices to liquidate their growing stock of repossessed properties and developments,' he explained.

Under the new rule, banks and cajas will have to increase their provisions from 10% to 20% of appraisal values for repossessed properties they have owned for a year or more. In the past they only had to write of 10% at the time of repossession. Now they must write of an additional 10% in provisions for properties they haven't sold after a year.

'It is being interpreted as a warning from the Bank of Spain that banks should stop their practise of disguising bad debts by swapping debt for property. It will also encourage banks to drop their prices to reduce their property holdings,' added Stucklin.

Banking analysts estimate that banks and cajas have repossessed property valued on their books at €36 billion. However, BBVA and Santander, Spain's biggest banks, are unaffected by the new rule. They were already making provisions of 20%.