Thank you very much for your reply. It was very helpful.

My wife is Spanish so I am some what familiar with the wage scales in Spain. I am amazed that given the wage scales in Spain that any normal person can afford to buy a flat in Madrid.

I don't know if there is any validitiy to this, but someone in Spain in the banking industry told me that when Spain converted to the Euro, alot of funds in Pesetas that had been hidden for tax purposes were injected into the economy. In order to continue to keep these funds off the books a lot of it went into real estate. This supposedly started the upward spiral of prices. Once the public saw the market heating up this drew in a lot more investors, legitamate and otherwise.

If this is true then, I'm told, what we are seeing is an artificial bubble of price inflation which should burst sometime after it becomes very much cheaper to rent than make a mortgage payment.

All will be revealed in the fullness of time.

I think you have the story straight. What is sad is that now citizens are being punished for lax laws. I know one family that got into 5 pisos with hidden money- just think of the quantity of pisos that have been financed this way. I've been looking/watching for 5 years now and still have old magazines with what now seem ridiculously low prices - if I had only known (or had the foresight to do something about it). Unfortunately, I didn't have a necessity to own and somehow let the opportunity slip away. I'm trying to get something just so I'm not pushed out of every real estate market (Spain, US, wherever). If prices continue to rise, I'll be forced to rent forever (not that that is bad, but I can't imagine affording it in my golden years).
I feel sorry for Spaniards who don't come from money or someone to help them out. Getting a house without an aval basically forces you to go with a sobre plano (and then you have the quality issues). My sister-in-law's contractor walked out on the project- they were left with a cement plot and no money. They spent a long time getting through the mess and more money than anticipated.