Why is the Spanish real estate market preparing for a slowdown this year??

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A decline is expected in the Spanish real estate market

Because of rising interest rates and tighter credit conditions, that could cause real estate prices to stagnate this year. However, a crash as large as the one experienced during the financial crisis is not expected. The market is expected to continue to outperform the eurozone average due to sustained demand. House price growth will slow down next year.

Spanish house prices up in 2022

Despite soaring interest rates and economic uncertainty, Spanish house prices are set to rise by an average of 7.4% in 2022, Eurostat data shows. However, this trend is expected to end in 2023. The positive headwind of falling interest rates has reversed over the past year. In addition, credit conditions are expected to become tighter and interest rates are expected to continue to rise in 2023, which will ultimately slow down the real estate market. We project that real estate prices will remain stable through 2023, with a possible decline in the first half of the year. While nominal price declines will be limited, real price declines are likely to be much larger: inflation-adjusted home prices are expected to decline by 7% over the three years from 2022 to 2024. Moreover, even after 2024, it is unlikely that house prices will continue to rise as fast as they have in recent years, as the benefit of falling interest rates has disappeared.

Increase in demand for housing in Spain

Mortgage rates have continued to fall over the past 10 years, leading to increased borrowing opportunities for families that exceed income growth. However, this trend came to an abrupt end last year as interest rates rose sharply. Since a return to the extremely low interest rates of the past is unlikely, this could be the end of the rapid price increases seen over the past decade.

Weakening demand for housing in 2023

Although mortgage originations and home sales remained strong in 2022, demand is expected to gradually weaken in 2023. The main reason is the increase in mortgage interest rates, the effects of which will be felt more and more strongly. In addition, lower economic growth and the impact of high inflation on purchasing power are also contributing to the market slowdown. Some factors that contributed to the growth of the real estate market last year are also expected to lose momentum this year.

Demand for homes last year was likely driven by families using their accumulated savings during the pandemic to purchase a home. In addition, many buyers may have accelerated their buying decisions last year to get ahead of rising interest rates. However, these factors are expected to lose momentum this year. Finally, further tightening of credit conditions will also dampen demand.

Expected increase in mortgage interest rates

Mortgage interest rates are forecast to rise further in 2023. The 1-year Euribor rose from -0.5% on January 1, 2022 to 3.5% by the end of March, resulting in a significant increase in mortgage rates. Mortgage interest rates are expected to continue to rise in the first half of 2023. As shown in the chart below, the gap between Euribor and mortgage rates has narrowed significantly recently, suggesting that mortgage rates have yet to catch up, with fixed rates presenting greater upside potential. As a result of the collapse of Silicon Valley Bank and Credit Suisse's acquisition of UBS, Euribor has declined significantly. However, it is unlikely that mortgage rates will follow this trend. The turmoil in the banking sector has led to a sharp rise in banks' funding costs, forcing them to tighten lending conditions in the coming months. According to the European Central Bank's latest bank lending survey, conducted before the problems in the banking sector, Spanish banks were already planning to tighten credit conditions in the first quarter of this year. The recent turmoil will only reinforce this trend. In addition, we expect the European Central Bank to raise interest rates further in the near term to contain inflation. Despite lower inflation due to lower energy costs, core inflation in the euro area remains stubbornly high. We assume that the ECB will raise interest rates twice by 25 basis points before reducing the rate of inflation in the euro area.