As property prices more than doubled in the 12 years to 2007, some local officials found unlawful ways of profiting from home construction. There are now 340 cases under investigation of officials and politicians suspected of crimes, according to Jesus Sanchez Lambas, head of the Spanish office of Transparency International, an organization that documents corruption.

In some cases, developers were given permission to build on unclassified land or were allowed to proceed without the appropriate permits, in return for cash or other incentives.

'Isolated Cases'

A spokesman for the Spanish Federation of Municipalities and Provinces, who declined to be named in line with policy, said "isolated cases of irregularities" don't detract from the work carried out by local government officials. The federation has a good governance code that aims to improve transparency and fight corruption, he said.

The national government set up a website in 2009 to enable buyers to see the development plans of more than 900 cities to check whether a property has been built within legally approved areas, Santiago said. It has also increased the number of investigators focusing on real estate corruption and imposed harsher penalties for civil servants who break the law.

Leo Levett-Smith, a 68-year-old retired traffic policeman from Cheshire, England, and his wife were told that the three- bedroom retirement home they bought in 2005 in Catral near Alicante for 220,000 euros was illegal three years after the transaction was completed.

'Legal Limbo'

The couple made the purchase through a registered real estate broker, hired a Spanish notary to oversee the deal and got a 130,000-euro mortgage from a Spanish savings bank. They also paid 300 euros for an independent survey on the property.

"We left no legal stone unturned and paid property tax to the local government to buy the place," Levett-Smith said. "Three years later, I was told it had been built without a sufficient permit. I've spent three years living in a legal limbo and the Spanish authorities have done nothing to address the issue."

Spain built 675,000 homes a year from 1997 to 2006, more than France, Germany and the U.K. combined, according to a report by a unit of Spanish savings bank Cajamar.

Falling Prices

Spanish residential property prices fell in real terms for the first time in more than a decade during the first quarter of 2008 and have dropped by an average of 20% since then, the Transport and Development Ministry said in a report today. In large coastal towns, prices have fallen by as much as 40%, according to the report, which was distributed in London before Blanco's presentation.

The housing boom that ended in 2008 left Spanish banks with 315.8 billion euros in loans related to real estate activities in the fourth quarter of 2010, according to the Bank of Spain. That's after they were forced to take on properties and land in return for canceling debt to bankrupt developers.