How is the Spanish real estate market coping with the challenges of the last decade?

Overview of the Spanish real estate market

Spain rightfully earns its reputation as one of those corners of Europe where many of its citizens prefer to live in their own homes. This makes the country particularly attractive to foreign investors in the real estate sector.

Low mortgage rates have prompted a large number of people to buy apartments and houses, even despite the not-so-favorable conditions offered by banks, which often prioritize their own interests.

Changes in legislation

In 2019, changes were made to the legislation aimed at creating more equal conditions in this market. However, the Spanish housing market faced numerous challenges, including political instability, the consequences of the pandemic, and rising inflation.

In this regard, it is important to determine how the Spanish residential real estate market has adapted to these challenges over the past decade and what changes have been observed in 2023.

Main themes of the article

• Changes in legislation
• Mass protests
• Golden Visa program
• Current realities of mortgage lending

Trends in the housing market

Over the past ten years, there has been a clear trend towards an increase in transactions in the secondary market, while the amount of social housing available to the population is gradually decreasing. The COVID-19 pandemic has significantly impacted the strategy of foreign investors who were planning to invest in Spanish real estate.

The gap in prices between the primary and secondary markets has become particularly pronounced, especially in the Balearic Islands, where housing costs have tripled.

Statistics on residential real estate transactions

According to statistical data from the Ministry of Transport, Mobility, and Urban Policy of Spain, the number of residential real estate transactions in the country steadily increased from 2013 to 2018. The most significant growth was recorded in 2014, when it reached 22% compared to the previous year.

• Restorative processes in the economy that began in 2013
• Increasing the purchasing power of the population
• Low mortgage interest rates (in 2014, the average rate was 3.8%)
• The growing interest of foreign investors, driven by the "golden visa" program.

Golden Visa program

This program, which started in late 2013, allowed foreigners to obtain residency in Spain on the condition of investing in real estate. Most investors opted for properties worth over 500,000 euros, although there were other options, including investments of more than 1 million euros in shares of Spanish companies or opening a bank account with a similar amount.

Decrease in housing market transactions

However, as early as 2019, a year before the pandemic began, the market started to experience changes: the number of transactions decreased by 2%. This decline was caused by several factors.

• Changes in mortgage legislation
• Compliance of the regulatory framework with European standards

All of this could negatively impact the activity of buyers and investors in the residential real estate market.

Changes in the mortgage process

The process of obtaining a mortgage and its subsequent repayment has become a real headache for many, as the introduction of new rules and regulations has raised numerous questions among potential clients. It is important to note that all the changes that have occurred in the field of legislation are primarily aimed at protecting the rights of borrowers, rather than benefiting banking institutions.

Mandatory participation of a notary

Since June 2019, the participation of a notary has been mandatory when processing mortgage loans. The notary is now required to thoroughly analyze all documents provided by the lending institution, as well as to assess potential risks. This allows them to recommend that the client postpone the transaction if it is deemed appropriate. This approach helps protect the client's interests and reduces the likelihood of problems arising in the future.

Checking the financial status of borrowers

In addition to this, banks have started to spend more time assessing the financial situation of borrowers. Now, lending institutions focus not only on the current income of clients but also on their potential for future financial growth. This is especially important for borrowers who will have to repay a mortgage even after retirement, when their income may change.

New reward conditions for bank employees

One of the most significant changes has been the new compensation conditions for bank employees. Previously, workers could earn commissions for processing mortgage loans, which often led to rushed and unfavorable deals for clients. The introduction of a new pay scheme has contributed to a decrease in the number of legal cases related to mortgages and has increased the transparency of the mortgage process.

Reallocation of expenses

It should also be mentioned that according to the new legislative framework, most of the costs associated with mortgage processing are now borne by the banks. This has provided significant support for buyers, who now have the opportunity to avoid substantial expenses when finalizing a mortgage deal.

Terms of early repayment

The changes also affected the terms of early repayment: now the process has become more accessible for borrowers, which in turn significantly alleviates the financial burden in situations where it is necessary to repay a loan before the established term. The extension of eviction timelines has also given borrowers more time to address their financial issues.

Cancellation of minimum interest rates

One of the important innovations is the cancellation of minimum interest rates on mortgage loans. Previously, banks had the ability to set a minimum rate and were not required to review it, even if global interest rates fell below the established level. This created unfavorable conditions for clients and put them in a difficult financial situation.

Protests in Catalonia

Another significant factor that influenced the residential real estate market was the mass protests in Catalonia, which took place from October 2019 until the end of that year. They were aimed at supporting politicians who were convicted for their involvement in the movement for the independence of the autonomous region. These events affected activity in the real estate market, leading to many transactions being canceled or postponed.

Changes in housing rental

Moreover, changes in the rental housing sector have also played a role in the overall decrease in the number of transactions in the market. Investors who initially planned to profit from rentals have begun to reconsider their strategies. In some regions of Spain, measures to control rental price growth have been implemented, leading to the establishment of indexing limits. These measures operate at the level of specific localities and depend on the rental market in each region.

Conclusion

Thus, the new rules and legislative changes have significantly altered both the mortgage and rental markets, impacting the interests of both borrowers and investors. These transformations have created reliable conditions for all participants in real estate transactions and have contributed to a more active development of the market in the future.

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The situation in the real estate market in 2020

The real estate market in Spain underwent significant changes in 2020 due to the COVID-19 pandemic and the associated restrictions. During this year, there was a decrease in the number of transactions.14%.

The tightening of lending conditions and the absence of tourists had a negative impact on buyer activity, especially in the middle and end of the second quarter. However, the final quarter of 2020 showed a slight increase: the number of transactions rose by1%compared to the same period last year. This was due to the easing of restrictions, the completion of previously postponed deals, and investors' desire to invest in real estate, which was seen as a more reliable asset amid unstable financial markets and low mortgage rates, which averaged2.3%in 2020.

Positive changes in 2021

In 2021, the real estate market became active again: the number of transactions exceeded650,000what does an increase of almost mean40%compared to 2020, which was affected by the pandemic. If we compare it to 2019, the growth was about20%.

This sudden activity came as a surprise to many experts, as the forecasts for that year were quite negative. Since the beginning of 2021, mass vaccination and the ability to conduct online property viewings along with remote transaction preparation have contributed to the rapid recovery of the market.

Records and slowdown in 2022

The year 2022 set a new record for the number of transactions, exceeding717,000However, at the end of the year, signs of a slowdown began to emerge: in the fourth quarter, the number of transactions fell by10%compared to the same period in 2021.

• High inflation in the eurozone countries has reduced the purchasing power of citizens.
• The increase in interest rates by the European Central Bank has raised the cost of mortgage loans, which has further reduced demand.

The first signs of a slowdown in 2023

The first quarter of 2023 also showed rather low results: during this period, it was recorded157,000deals that on10%less than in the same period of 2022. Measures to control inflation are likely to have a negative impact on activity in the real estate market, and a general decline in the number of transactions is expected this year compared to previous figures.

Difficulties of mortgage lending

When considering the difficulties and current conditions of mortgage lending, it is worth noting that both in Lithuania and Spain, mortgage lending remains a common way to acquire housing. However, before the legislative changes in 2019, this sector faced a number of issues related to a lack of transparency and legal aspects of transactions conducted using borrowed funds.

Thus, the changes in legislation have helped improve the situation in the market and increase its attractiveness for investors.

Changes in mortgage lending in Spain

Recently, there have been significant changes in the field of mortgage lending in Spain, driven by complex and unfavorable conditions imposed by many banks in their obligations. This, in turn, has led to an increase in legal disputes between banking institutions and borrowers who sought to challenge various clauses in loan agreements. The current situation has negatively affected citizens' interest in purchasing homes used as collateral.

Responsibility for mortgage debts

Improper practices in the lending sector began to decrease after 2019, when the responsibility for mortgage defaults was shared not only between borrowers but also with banks, which contributed to a change in their lending approaches.

Immigrants and mortgage deals

Moreover, these issues affected immigrants involved in mortgage transactions, where two lenders (often unfamiliar with each other) were required to ensure compliance with the terms of the contract. If one of the borrowers failed to meet their obligations, it immediately impacted the financial situation of all parties involved.

• Real estate agencies have actively started advertising mortgage loans.
• They offered help in finding guarantors, often strangers.
• Strangers willing to take on this role for a monetary reward became such individuals.

Current mortgage interest rates

Speaking about the current conditions of mortgage lending in Spain, it is worth noting that since July 2022, there has been a steady increase in rates. In June 2023, fixed rates reached 3.7%, while variable rates stood at 3.2%. Over the past year, rates have increased by an average of 1.4 percentage points.

The secondary housing market in Spain

In recent years, there has been a clear dominance of transactions involving secondary housing in the Spanish real estate market. Specifically, more than 89% of all residential property transactions are dedicated to these deals, while the share of new apartments and houses for sale ranges from just 8% to 10%. The situation that arose after the 2008 crisis led to a significant reduction in the volume of residential construction, and this impact continues to be felt even several years later, up until 2013.

Despite the fact that new construction projects continued to be implemented, many initiatives faced difficulties due to a decrease in market activity and financing issues, which did not contribute to the growth of the primary housing market.

The level of construction before the pandemic

Before the pandemic, the construction level was showing some stability, but it remained significantly lower than the figures recorded before 2008. It is important to highlight some advantages associated with purchasing new housing.

• Flexible payment terms:One of the significant advantages is that buyers can expect more flexible payment terms when purchasing real estate during its construction phase. Typically, the down payment for new properties is around 10% of the total cost of the housing, and the mortgage application process occurs after the property is put into operation.
• Modern energy efficiency standards:New buildings meet modern energy efficiency standards, which significantly reduces heating and electricity costs. In most cases, new residential complexes are delivered ready for occupancy and offer developed infrastructure, making them particularly attractive to potential buyers.

Taxation of real estate transactions

It should also be mentioned that there are differences in the taxation of transactions involving primary and secondary housing. For new properties purchased directly from developers, the following applies:value-added tax (VAT)in the amount of 10%. On the contrary, buyers of secondary housing are required to payproperty transfer taxwhich varies from 6% to 10%, depending on the region.

Social housing in Spain

Social housing in Spain currently accounts for less than 3% of the total number of transactions. This trend began in 2013 and there has also been a gradual decline in this segment. Protected or social housing (known as "vivienda protegida") refers to properties that are provided under special conditions for families or individuals with low income, according to criteria set by the government.

Types of social housing

There are many types of this housing, but an important aspect is that such properties are built by developers who enter into agreements with government authorities and receive funding from the state. The difference between the market price of these apartments and the price set for them under government programs is the subject of state subsidies.

Property areaThe area that participants in this program can apply for may vary, but the maximum limit is 150 square meters. It is important to note that such measures help ensure housing accessibility for those in need, which is undoubtedly a significant step in the development of the country's social policy.

Housing price regulation program in Spain

A new program has been launched in Spain that regulates market prices for housing and also offers the option of renting with a purchase option. According to the established rules, there are limits on the maximum monthly and annual rental rates, and the area of the rented residential premises cannot exceed 150 square meters.

In addition, for the youth category, specifically for residents under 35 years old, special rental conditions with the option to buy are provided, where there are also restrictions – the living space must not exceed 70 square meters.

The process of obtaining social housing

In order to start the process of applying for social housing, anyone interested must register in the state registry at their place of residence in a specific autonomous community. It is also important that the applicant does not own any other property and has not received any government assistance in the last decade.

Next, an assessment of the financial situation is conducted, where the family's income must not exceed 5.5 times the IPREM indicator (a measure of public income). This year, this indicator is set at 7,200 euros.

Restrictions and obligations

There is also a significant limitation for social housing:

• These objects can only be sold 10 years after their acquisition.
• The sale is only possible with the permission of government authorities.
• All the money received from sales must be returned to the budget.

The impact of the pandemic on the real estate market

The impact of the COVID-19 pandemic has significantly changed the plans of foreign citizens considering the purchase of Spanish real estate. Demand in the market from non-residents remained relatively high until 2013, when about 10% of all transactions were attributed to them.

However, during the height of the pandemic, when travel restrictions were at their strictest, the country's economy came under significant pressure, and uncertainty increased, leading to a decrease in the share of transactions with non-residents to 6%.

Golden visa program

The "golden visa" program, which offers the opportunity to obtain residency in Spain through real estate purchases, remains attractive to foreign investors. However, in 2023, one of the political parties proposed to either terminate or significantly revise this program in light of rising residential property prices.

Current trends in the real estate market

As of today, the real estate market is showing a steady increase in prices, with a particularly noticeable gap between the primary and secondary markets that continues to widen. On the islands, prices have tripled.

Over the past ten years, the average prices for new housing in Spain have traditionally exceeded those of secondary housing. This creates additional difficulties for those looking to purchase their own home, as housing affordability continues to become an increasingly challenging issue.

All these changes and current conditions can have a significant impact on the development of the real estate market and its trends in the future.

Key trends in the Spanish real estate market

In recent years, the Spanish real estate market has shown interesting trends, especially regarding price changes. If we analyze the situation with prices for new apartments, we can see that from 2013 to 2020, the cost of real estate has significantly increased.

At the beginning of this time period, in 2013-2014, the growth was about 20%, but by 2020 this figure had already reached 60%. Therefore, over the course of the decade, new buildings consistently increased their prices, which can be attributed to a number of factors, including the rising demand for housing.

Changes in prices for new housing in 2023

By the end of the first half of 2023, it can be confidently noted that the average price of new real estate has increased by 2% compared to the previous year and now stands at over 266,000 euros. When comparing this period to 2013, the price has risen 1.7 times, indicating a significant interest from investors.

Factors influencing price growth

The rise in prices for new apartments and houses is linked to the growing demand for modern real estate, characterized by:

• Thoughtful layouts
• High-quality finishing
• Modern equipment

Such apartments are becoming more attractive to buyers as they represent a good investment. In contrast, the secondary real estate market has shown more modest growth over the past 10 years – only 35%. In 2023, the average price in the secondary market was 173 thousand euros, fluctuating within 5% of the 2022 level.

Popular tourist destinations

In the primary market, popular tourist destinations in Spain stand out, such as the Balearic Islands, Malaga, and Tenerife. In these regions, housing prices have doubled over the past few decades for Malaga and Tenerife, while in the Balearic Islands, including well-known places like Mallorca and Ibiza, the increase has been an impressive 2.7 times.

As of today, the average price of new housing in the Balearic Islands exceeds 642,000 euros, making this region the most expensive in the country. More affordable options are available in Malaga and Tenerife, where prices are 379,000 and 312,000 euros, respectively.

Investment attractiveness of the market

The high interest from tourists and the increased popularity of these regions create favorable conditions for investing in real estate. Seville is also experiencing significant growth: in this city, the average housing price has doubled since 2013. More moderate price changes are observed in the Canary Islands, as well as in major cities like Barcelona and Valencia.

The situation in Madrid

It is necessary to mention the capital of Spain – Madrid. Although, according to the overall analysis, housing prices here have doubled over the considered period, there is a trend of decreasing prices this year. In the first quarter of 2023, a slight increase of 5% was recorded, but by the end of the second quarter, the average price had decreased by 9%.

Dynamics of the secondary market

As for the secondary market, its dynamics are more stable; significant price increases occurred only in Madrid and Malaga, where the growth was 70%, and in the Balearic Islands, it reached 90%. The highest prices are recorded in these regions:

• 368 thousand euros in the Balearic Islands
• 293 thousand euros in Madrid
• 296 thousand euros in Malaga

These facts confirm that the real estate market in Spain continues to develop and attracts more and more investors.

Conclusion

In conclusion, it should be noted that the Spanish real estate market has undergone multiple changes and challenges over the past ten years, reflecting both internal and international economic and political trends. Despite factors such as fluctuations in legislation, the economic consequences of the pandemic, and ongoing inflation, the market has managed to demonstrate resilience and adapt to new conditions. This, in turn, highlights the significance of Spain as an attractive destination for foreign investors, especially in light of initiatives such as“golden visa”that are still relevant.

Prospects for 2023

Speaking about the prospects for 2023, the following trends can be observed:

• Ongoing rupturebetween the primary and secondary markets.
• Increased interest in real estate on popular resort islands, where prices have risen significantly.
• Changes in mortgage lending legislation aimed at protecting borrowers create more transparent and secure conditions for future transactions.

It is interesting to note that despite the protests and political unrest, the Spanish people do not lose hope, and foreign investors still see Spain as a promising market.

Final word

Personally, I am confident that the future of the Spanish housing market depends on the ability to adapt to new conditions and move forward by balancing the interests of both local residents and foreign buyers. It is important for the authorities to continue working on creating a comfortable and safe environment for all market participants. Observing these changes, I remain optimistic about the further development of real estate in Spain, which still remains one of the most desirable destinations for housing investment in Europe.