Home prices will not decline in 2023, real estate experts say.

The real estate market is experiencing a slowdown in activity after two years of significant increases in residential sales transactions following the pandemic. The high level of inflation in Europe has led to an increase in interest rates of the Central Bank of Europe (CBE) to 4.5%, which has led to exceed 4% euribor, the main index that determines mortgage interest rates in Spain, since June this year. This decision changed the supply of credit in Spain in a year to access housing.

At the same time, the supply of residential homes continues to decrease, while the demand for their purchase is steadily increasing. According to Daniel del Pozo, CEO of idealista/data, "we see that at the moment the demand for real estate sales exceeds supply by 16% compared to last year, while the supply of homes on the market has decreased by 7%. With this situation, we can assume that prices will not decrease until the end of the year, and we can expect a 2% increase in national prices by the end of the year", emphasizes the expert in real estate market data analysis.

The number of transactions made between 2021 and 2022 exceeded by 19% the volumes made between 2018 and 2019, before the coronavirus crisis, according to statistics from Spain's National Institute of Statistics (INE). Fewer transactions are expected for this year than in 2022, when around 650,000 transactions were recorded, the best result since 2007, according to the national institute. "We believe that the strategy of raising interest rates is coming to an end. After the last increase in September, we can expect some easing next year, leading to a renewal of purchasing expectations and a gradual reduction in the financial debt standards of families and businesses," adds Juan-Galo Macia, president of Engel & Völkers Spain.

The decline in the number of transactions does not, so far, lead to a slowdown in the housing market, as was the case after the bursting of the real estate bubble of 2008 in Spain. By July this year, more than 360,000 housing units had been sold, down 5.3% from the same period last year, according to INE. And more than half a million homes are expected to be sold by 2023, under conditions similar to the pre-pandemic period (2018-2019) or even better. "It is undeniable that rising interest rates have resulted in the majority of real estate transactions being priced below the average of previous years. While in 2021 the average value of transactions in our real estate network exceeded 200,000 euros, by the end of the first half of 2023 the average value did not exceed 150,000 euros," commented Ricardo Sousa, CEO of Century 21 for Spain and Portugal.

Unlike the real estate bubble of the 2000s, prices have not risen rapidly since the coronavirus situation worsened, although they are still rising at the moment. The significant increase in housing transactions is accompanied by an increase in official prices of 3.7% in 2021 and 7.4% in 2022, according to INE. By the end of 2022, prices for offers posted on idealista have risen by 5%, and at the last report as of August they were up 7.2% year-on-year, surpassing €2,000/m2 for the first time since the summer of 2008. According to Gonzalo Velija, Development Director of RE/MAX Spain, "we expect a slight slowdown in house price growth in Spain, which we are already seeing at present, and a small negative adjustment towards the end of the year of around 3%. Nevertheless, demand is very strong but supply is almost non-existent, hence this low price adjustment compared to the reduction in transactions.

With this sluggish market and the current economic uncertainty, it was expected that prices would start to decline, but this situation has not yet occurred, although a slowdown in price growth compared to 2020 is already noticeable. INE's house price index rose by 3.6% year-on-year in the concluding quarter of 2023, in line with the start of the year, but far from the 8% seen in the first half of 2022. Notaries, on the other hand, noted a 4.6% drop in prices for homes sold in July. From the General Council of Real Estate Agents, they report that "housing prices are already beginning to stabilize." One of the council members, Ángel Martínez León, also indicates that "we will see a decline in the prices of basic housing in the range of 150,000 to 200,000 euros downwards, caused by the increase in the value of mortgages".

The change in house prices in Spain is not comparable to the double-digit growth occurring in other important economies and the real estate boom in other countries between 2021 and 2022, which led to the bursting of the real estate bubble in the US, UK, Germany and Sweden, among other countries.

"This is not a new situation. We have already seen it at other times when the real estate market was contracting and the fall in sales was reflected in prices after a while", comments Emiliano Bermudez, deputy general manager of donpiso. "Now we are in this moment, in this phase where the market is contracting and we see that house prices, which last year increased by about 3%, will probably also increase this year, but less than 3%. By the end of the year, we will not see a deflationary process of a significant decline in house prices, perhaps we will see it in the first half of 2024," he accurately defines the situation.

The housing market is diverse and consists of different sectors. Experts note that over time, there will increasingly be cities that show more resilience, as well as which types of homes and market niches will have more positive dynamics than others.

"The main provincial capitals will continue to be growth drivers, namely Málaga, Madrid, Valencia, Alicante and Santa Cruz de Tenerife and, to a lesser extent, Barcelona and Las Palmas de Gran Canaria," emphasizes the idealista/data CEO. "The increase in interest rates and the rising cost of mortgages have affected part of the demand. However, there is still a lot of solvent demand, both from local and foreign clients who buy without a mortgage or have enough savings to obtain financing," specifies Daniel del Pozo.

According to Juan-Galo Macia, "the decision-making process is being delayed by the current economic environment, but growing international demand is putting upward pressure on prices. It is likely that many residential properties will have moderate price reductions, but we are rather doubtful about price reductions for premium assets with attractive locations and qualities," confirms the president of Engel & Völkers Spain.

The luxury market operates according to its own rules, independent of the regular market, and is more stable during economic and political changes, as many transactions exceed 2 million euros and are rarely financed through banks, emphasize representatives of a high-end real estate company.

Meanwhile, Century 21 notes that "the factors having the greatest impact on the real estate market are the limited availability of housing and low levels of construction and renovation in metropolitan areas. We are observing an increasing trend towards urban concentration," adds CEO Ricardo Souza.

On their part, donpiso notes that "large cities will be the first places where adjustments in housing prices will occur. Prices in major cities are under pressure, precisely where there is high demand, and it is there that price reductions will happen first," said Emiliano Bermudez, deputy general director of donpiso.

“We also see a decline in investments in long-term rental housing, especially on a small and medium scale, aside from large real estate operations. Rental policies, such as the Housing Law, are not good news for investment growth in the real estate market,” clarifies the real estate expert. The rental market will be analyzed by real estate experts at idealista/news.