Spain's overpriced property stocks came crashing down on Tuesday, with panic selling in the real estate sector signalling the end of a 10-year-old construction boom.

The sell-off dragged down related industries such as construction and banking and caused a 2.7 per cent drop in the Ibex 35 index of leading shares. The fall also rippled through other European markets as investors worried about its knock-on effects.

Sacyr Vallehermoso, the Spanish builder locked in a hostile takeover battle for Eiffage of France, fell 8 per cent, significantly reducing the value of its all-share bid.

Investors got the jitters after Astroc, a Valencian real estate developer, went into free-fall last week when its audited accounts revealed some of last year's profits came from the sale of Astroc assets to Enrique Bañuelos, its chairman.

Mr Bañuelos told a press conference he was considering changing auditors. Astroc's shares have fallen 70 per cent in a week.

Meanwhile, the heavy debt load of some real estate groups and worries about oversupply – with 800,000 new housing starts approved for this year, compared with an estimated demand for 600,000 – also contributed to the sell-off.

The sector has also lost its shine as a result of several corruption scandals linked to property deals.

Astroc had been the darling of the stock market, rising by 1,000 per cent after its listing last May. The top five real estate groups – Colonial, Metrovacesa, Fadesa, Urbis and Inmocaral – rose 132 per cent last year.

During the boom, the real estate sector had attracted some of Spain's richest billionaires, such as Amancio Ortega, chairman of the Inditex fashion empire and a shareholder in Astroc.

"The real estate bubble has not burst. It is the inflated valuations of some real estate companies that has been pricked," said Natalia Aguirre, head analyst at Renta 4, a Spanish broker.

"The sector was trading at a 20 per cent premium to its net asset value. This was not sustainable," she added.

María Trujillo, Spain's housing minister, said on Tuesday that the real estate market was heading for a soft landing, rather than a crash.

House prices rose 7 per cent in the first quarter, their lowest increase in eight years. But in many parts of Spain, house prices are falling.

ΠΗΓΗ: FT.com

Spanish property

The pain in Spain

Signs that a 14-year boom is ending

THE only question in Spain now is which bubble is bursting. Are only overvalued property companies in trouble, or is the country's entire property market going down? For the economy as a whole, in which construction weighs in at a hefty 18%, it could mean the difference between a soft landing and a hard one, after 14 years of a construction-led boom that put Spain near the top of the euro zone's growth league.

In the past week Astroc, a property company based in Valencia, saw its shares fall by 65% in what looked like a response to tighter planning regulations in the region. The worries have spread to other property groups, where shares have tumbled by more than a fifth since April 17th. Having been floated last May, Astroc's shares had risen tenfold before the crash. Share prices of other leading property companies, such as Colonial, Metrovacesa, Fadesa, Urbis and Inmocaral, also soared last year. Worries spread wider into construction stocks such as Ferrovial, Acciona, ACS and Sacyr Vallehermoso, and banks such as Santander and BBVA, knocking the Ibex stockmarket index off by 1.7% in the week up to April 25th. On that day it was partially pepped up by reassuring noises from government officials and bankers.

Helped by low interest rates since it joined the euro in 1999, Spain has been erecting houses at an astonishing rate. Last year it built 800,000, reckoned to be more than France, Germany and Italy combined. Economists in Madrid forecast that the house-building boom will keep slowing until the new-build rate more closely matches the rate of new household formation, around half a million a year. House-price rises are already slowing, albeit not brutally. They peaked at about 18% a year in late 2003, and are now running around 7%, with some expecting them to slow further. Around the outskirts of Madrid there are new property developments where work appears to have stalled. The Bank of Spain has said in recent years that house prices were 35% overvalued.

Ever since the collapse in subprime lending in America there have been fears that the contagion would spread to those European economies, Spain and Ireland, which have been most heavily dependent on property and construction for their recent growth. But Spanish bankers like to point out that their lending conditions are more rigorous than America's. Credit evaluations for mortgage applicants are often methodically carried out using tax returns.

Whatever happens to the Spanish housing market, which is roughly half of the total construction work in Spain, the effect on the big building contractors should be limited by their recent strategies. Firms such as Ferrovial and Acciona have been diversifying into other sectors and markets overseas. Acciona has moved heavily into energy, while Ferrovial has gone into services, buying for instance BAA, owner and operator of London's airports. However, like Spanish homeowners, many of them are up to their necks in debt.