Arancha Ibarra considers herself one of the lucky victims of Spain's housing market collapse. After struggling to find a buyer for her renovated two-bedroom apartment in Madrid for two years, Ibarra found a tenant for €750 a month, becoming one of the 1.5 million second-home owners thrust onto the country's rental market.

The number of properties for rent in Spain climbed 55% in the past two years to 3.3 million, the highest since the ministry of housing started collecting the data in 2004.

Rents in cities, including Madrid and Barcelona, are falling for the first time in seven years with declines of as much as 8%, according to property research firm Idealista.com.

"Those who need to sell but can't are being forced to lease," said Fernando Encinar, co-founder and head of research at Idealista, Spain's largest property website with 308,000 listings for rent and purchase. "We haven't seen this number of properties for rent since the 1950s."

Spain built about 29% of new homes in the EU from 2001 to 2007, even though it represented just 9% of the population. The resulting glut of 1.5 million unsold houses and apartments sparked the end of a decade-long property and construction boom that accounted for about 20% of the country's gross domestic product in 2007.

The ensuing housing slump has tipped the economy into the worst recession in 60 years with the unemployment rate climbing to 19%, the highest in the EU. Home sales fell by more than a third in the 12 months to May, the latest government data show.

Rents in Madrid and Barcelona jumped 28% and 56%, respectively, in the five years to 2008, driven by a jump in house values. Home prices rose 120% from 1997 to 2007, pricing many Spaniards out of the market.

This year rents declined 4.2% to €12.30 per square metre in Madrid and 8% to €12.60 in Barcelona, Idealista reported.

Guillermo Bruzon, a researcher at the IESE business school in Madrid, said rents will continue to fall in coming years.

"Price deflation is fundamental to ensure that people have access to housing, whether it be rented or purchased," he said in a telephone interview. Prices and rents as a proportion of incomes have become "unsustainable," he said.

After two years of trying to sell her 70 square-metre air-conditioned apartment in Madrid, Ibarra rented it after receiving just one offer of €162,273, 33% below her asking price.

"The rent barely covers the mortgage, but doesn't pay the council tax and maintenance," she said in an interview in Madrid. "It was the best price I could get and I can't afford to sell at a loss or leave it empty."

Owners of vacant homes also have to pay a yearly tax that's equal to 1% to 2% of the property's value.

Spaniards aren't the only ones saddled with empty homes. The nation's banks lent about €318bn to domestic property companies and also were forced to accept billions of euros of property assets in exchange for cancelling debt with insolvent developers, according to Fernando Rodriguez de Acuna, president of RR de Acuna & Asociados, a Madrid-based industry research company founded in 1980.

"Those assets are sterile, or constantly falling in value, so the banks have to get them off their books or else they will damage their balance sheets in coming years," Acuna said.

Banco Santander, Spain's biggest bank, together with its consumer unit Banco Espanol de Credito, has €4.1bn of property assets after taking real estate from failing developers.

Santander put 1,800 homes up for sale in January and had sold 500 of them as of May, a company spokesman said. He declined to provide a breakdown of the bank's residential and commercial property assets.

Banco Bilbao Vizcaya Argentaria, the Spanish lender that bought €490m of property in the first quarter, forecasts that will climb to €1bn by the end of the year. Caja Madrid, the country's second-largest savings bank, has about 600 homes for rent and is offering as many as 1,500 others for sale at discounts of as much as 40%.

Acuna estimates the slump in Spanish residential property will last seven years, prolonging the recession until 2013.

"Recovery is going to depend on when people can purchase homes again, which in turn depends on employment," Acuna said in an interview at his office in Madrid.

Acuna estimates the economy will contract by 4% in 2009 and 2010, by 2% in 2011, and 1% in 2012. Growth will be zero or minimal in 2013, he said.

The Spanish government has forecast that the economy will shrink by 3.6% this year and 0.3% in 2010, and will then grow 1.8 % and 2.7% in 2011 and 2012. Joblessness in Spain may reach 20.5% by the end of 2010, according to European Commission estimates.

"Redundancy is having a huge impact on home sales; hence many people are turning to renting," said Ben May, an economist at Capital Economics in London. "Even people who still have jobs are clearly going to be worried and those who are in a position to buy are waiting for prices to fall."

The IMF expects Spanish property prices to drop 30% from their peak in 2006. They've already declined 7%, analysts at Citigroup estimate.

Irene Garcia is one of about two million Spaniards who have joined the ranks of the unemployed in the past year. The 33-year-old ex-production assistant gets €700 a month in unemployment benefits and pays €400 a month to rent a room in a shared apartment. The good news is her rent is about to drop 50%.

Garcia, a native of Galicia who moved to Madrid three years ago, found a room in an apartment in the city centre. It was empty for six months, prompting the owner to cut the rent to €200 a month.

"I'm getting the same living space in the same area and saving 50%," Garcia said. "I don't know when the crisis will end or how long I will be unemployed, but this gives me a lifeline of six months."

Ibarra knows she'll have to wait much longer than that for the market to recover so that she can sell her home.

"It's crystal clear that, in its current state, the market is going to take at least five years before we see things pick up again," she said.

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