Boom or bust? What awaits the Spanish real estate market in2023? Olive Press Spain News

Most buyers and sellers I talk to lately keep mentioning the possibility of a recession coming. How can they not consider this fact? Just look at the news, and every day there are reminders of economic difficulties, including the real estate sector. I'm sure you know the situation: inflation and rising interest rates, a looming recession, war in Ukraine and tensions with China. However, at the same time, there is still a lot of optimism in the Spanish real estate market and the economy as a whole that the current problems are short-term and temporary. Which version of reality is true and what does this mean for the Costa del Solreal estate market? Should one be optimistic or pessimistic? Let's start with the bad news.

Inflation and interest rates

Inflation has increased due to a number of factors. Some are from Covid and damage to supply chains after restrictions were lifted. Others are from inflationary spending in an attempt to prevent economies collapsing and people going bankrupt. Of course there is also the impact of the war on fuel costs, and to balance the economy central banks have raised interest rates several times this year. Whether it works or not, rising interest rates have a significant impact on the real estate market, especially because it reduces demand by raising the cost of borrowing.

Sweden and real estate on the Costa del Sol

There is some more bad news when we start looking at the Costa del Sol's customer base, such as Sweden, which accounts for 14% of buyers in the province of Málaga. In Sweden, 10-year mortgage rates now range from 4.44% to 4.9%. For a loan of 200,000 euros, this means a monthly payment of 1,111 euros. That's a big jump from last year, when you could pay less than €800 a month on the same mortgage. To make matters worse, Swedish interest rates are still rising and are expected to reach at least 3.5% -4%. With the premium that banks charge on top of the prime rate, mortgage interest rates could reach 6% before the rises end. As a result, Swedish house prices and sales volumes are falling sharply. House prices have fallen by more than 11% since March. The Riksbank predicts that the price decline will continue and reach 19.9% by the end of 2023 compared to the peak. The reason is clear: Swedes are deeply locked in debt with a debt to net income ratio of a little over 200%. In fact, all Scandinavian countries have very high debt to net income ratios. Only Holland is in the same range with a debt-to-income ratio of 222%.

Real estate market in Spain

But don't panic, now for the good news. Here in Spain, the housing market, which survived one of the worst crises in the western world between 2008 and 2014, is in much better shape. The experience of that crisis has influenced the behavior of sellers and buyers, as well as the broader market, making it one of the most resilient in Europe. Household debt is now less than half of what it was in Sweden and Holland. In fact, it fell by 50% between 2010 and 2020, amounting to just over 100% of net disposable income. Furthermore, when the market recovered in 2015 after the crisis, during which prices fell by 37%, Spaniards began to move to fixed interest rates on mortgages. This provided them with protection against exactly the kind of interest rate fluctuations we see today. Around 72% of mortgages are now on fixed terms, compared to almost 100% of variable rate mortgages just before the crisis. In contrast, in Finland 96% of new home loans have a variable interest rate and in Sweden 48% of new loans have a variable interest rate. Moreover, Spanish prices have never fully recovered from the last crisis and are mostly still well below their 2007 peak. Even with the post-Covid recovery, prices are up only 5.5%. In other words, Swedish house prices have risen almost six times as much. There is agreement that price growth in Spain will slow down in the next two years by m

Other factors

There are also other factors to consider. For example, Spanish interest rates are likely to remain significantly lower than in other jurisdictions, probably as low as 3.6% for fixed rates and 4.1% for variable rates before stabilizing (according to ING). This is in comparison to Sweden's fixed mortgage rates rising above 5% and UK rates, which will also remain in the 5% to 6% range for the next two years. This makes Spanish money cheaper for borrowers from these two countries, and more affordable housing and mortgages in Spain could provide an alternative to the more volatile markets back home. Let's hope so. It is also good that the Junta has made the region a more attractive destination by abolishing the property tax that penalized foreigners who have property abroad. In conclusion, I think there are many reasons to remain optimistic. I expect that real estate on the Costa del Sol, especially in the higher end, will feel less of an impact compared to Northern Europe. And while, yes, price growth will slow, we are unlikely to see a significant decline. Stability and sunshine are my key takeaways for this year!