"Reflection or Boom?: Spanish Real Estate Market in2023"

Most buyers and sellers I talk to lately constantly mention the possibility of an economic recession. How can you not notice? Just look at the news, and every day they remind us of economic difficulties, including the real estate sector. You know this story: inflation and rising interest rates, growing recession risks, the war in Ukraine and tension with China. However, at the same time, there is still a lot of optimism in the Spanish real estate market and in the economy as a whole, that current problems are short-term and temporary difficulties. Which version of reality is true and what does it mean for the Costa del Sol housing market? Should we be optimists or pessimists?

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Inflation has increased due to a number of factors. Some of them are related to the pandemic and damage to supply chains after the lifting of restrictions. Others are due to inflationary spending in an attempt to prevent economic collapse and people's bankruptcies. Of course, there is also the impact of war on fuel prices, and central banks have raised interest rates several times this year to rebalance the economy. Regardless of whether it works or not, the increase in interest rates has a significant impact on the real estate market, especially as they reduce demand and increase the cost of borrowing.

There is another bad news, when you start looking at the customer base on the Costa del Sol, for example Sweden, which accounts for14% of buyers in the province of Malaga. In Sweden, mortgage rates for10 years now range from4.44% to4.9%. With a loan of200,000 euros, this means a monthly payment of1111 euros. A year ago, the same mortgage could be obtained at a rate of1.5%, with monthly payments of less than800 euros. And Swedish interest rates are still rising, and it is expected that they will reach3.5% -4% at least. With the premium that banks charge on top of the base rate, mortgage rates could reach6% by the end of increases. As a result, housing prices in Sweden and sales volumes are sharply declining. Housing prices have fallen by more than11% since March. The Riksbank predicts that the price decline will continue, reaching19.9% by the end of2023 from the peak. The reason is clear: Swedes have a high level of debt, with a debt-to-income ratio of just over200%. In fact, all the Scandinavian countries have very high debt-to-income ratios. The only country in the same league is the Netherlands, with a debt-to-income ratio of222%. There have also been unsustainable price increases, for example in Sweden they have increased by an incredible32% since2019, while in the Netherlands they have increased by40%. It is precisely because of this imbalance between debt and income and unsustainable price growth that "The Economist" recently raised concerns. "Price declines in the housing market and recessions that precede such debt accumulation are usually more serious. With central banks now raising rates at the fastest pace in over four decades, countries struggling with mortgage debt will once again face unpleasant consequences".".

But don't panic.

Here in Spain, the real estate market, which experienced one of the most serious crises in the Western world from 2008 to 2014, is in much better shape. The experience of this crisis has influenced the behavior of sellers and buyers, as well as the market as a whole, making it one of the most resilient in Europe. Household debt now stands at less than half compared to Sweden and the Netherlands. In fact, it has decreased by 50% from 2010 to 2020, amounting to just over 100% of net disposable income. Furthermore, as the market began to recover in 2015 after the crisis, when housing prices fell by 37%, Spaniards started switching to fixed-rate mortgages. This has provided them with protection against the fluctuations in interest rates that we see today. Currently, about 72% of mortgages are fixed-rate, whereas before the crisis, almost all mortgages had variable rates. In contrast, in Finland, 96% of new mortgage loans have variable rates, and in Sweden, 48% of new loans do.

Moreover, Spanish housing prices have not returned to pre-crisis levels from 2007 and remain significantly lower. Even after recovering from the pandemic, prices have only increased by 5.5%. In other words, housing prices in Sweden have risen nearly six times more. There is a consensus that price growth in Spain will slow down over the next two years as economic issues are addressed. There is also agreement that Spain will perform better than most countries. However, it is unclear what exactly this means. Bankinter believes that prices will drop by 3% next year and then by 2% in 2024. ING, on the other hand, thinks that prices will rise by 1% in 2023 after a 7% increase in 2022. This still indicates a real price decline, considering that ING expects inflation to decrease to 4.4% in 2023, which translates to a real price drop of 3.4%. In any case, this is better than the average price drop of 9% that the European Central Bank anticipates for the eurozone as a whole. In the UK, market analysts expect housing prices to fall by 5-10% as early as next year. Thus, the Spanish real estate market is structurally in a more favorable position than much of Europe.

There are other factors to consider as well.

For example, Spanish interest rates are likely to remain significantly lower than in other jurisdictions, probably around 3.6% for fixed rates and 4.1% for variable rates, before stabilizing (according to ING). In comparison to Sweden, where fixed mortgage rates have exceeded 5%, and the UK, where rates are also expected to remain between 5% and 6% over the next two years, Spanish money is cheaper for people from these two countries, and more affordable housing and mortgages in Spain could be an alternative to the more volatile markets back home. Let's hope for that. It's also good that the Junta has made the region a more attractive destination by abolishing the property tax that penalized foreigners owning property abroad.

In conclusion, I believe there are many reasons to remain optimistic. I expect that real estate on the Costa del Sol, especially in the high-end segment, will feel fewer repercussions compared to Northern Europe. And while, yes, price growth will slow down, we are unlikely to see a significant decline. Thus, stability and sunshine are the key takeaways for this year!