Souls-thunders: What awaits the real estate market in Spain in2023?

Most of the buyers and sellers I’ve been talking to lately constantly mention the possibility of an economic downturn. How can one not pay attention to this? Just look at the news; they remind us every day about economic difficulties, including in the real estate sector. I’m sure you know this scenario: inflation and rising interest rates, an impending recession, the war in Ukraine, and tensions with China. Nevertheless, at the same time, there is a lot of optimism in the Spanish real estate market and the economy as a whole, and it is believed that the current problems are short-term and temporary. Which version of reality is true, and what does this mean for the real estate market on the Costa del Sol? Should we be optimistic or pessimistic?

Bad news

Inflation has risen due to several factors, including the aftermath of the pandemic and damage to supply chains following the lifting of restrictions. Additionally, due to military actions, fuel prices have also increased, and to rebalance the economy, central banks have raised interest rates several times this year. Whether this will work or not, the increase in interest rates has a significant impact on the real estate market, especially since it reduces demand by raising the cost of borrowing. There is more bad news when you start looking at the customer base on the Costa del Sol, such as Sweden, which accounted for 14% of buyers in the province of Malaga. In Sweden, 10-year mortgage rates currently range from 4.44% to 4.9%. For a loan amount of 200,000 euros, this means a monthly payment of 1,111 euros. This is a significant jump from a year ago when the same mortgage could be obtained at a rate of 1.5%, with payments of less than 800 euros per month. And rates in Sweden continue to rise, with expectations that they will reach at least 3.5% - 4%. Considering the premium that banks charge above the base rate, mortgage rates could reach 6% before the end of the increases. As a result, housing prices in Sweden and sales volumes are sharply declining. Housing prices have dropped by more than 11% since March. The Riksbank forecasts that the decline in prices will continue and reach 19.9% by the end of 2023 compared to the peak. The reason is clear: Swedes are deeply in debt with a debt-to-net-income ratio of just over 200%. In fact, all Scandinavian countries have very high debt-to-net-income ratios. The only country in a similar situation is the Netherlands, with a debt-to-income ratio of 222%. There have also been unsustainable price increases; for example, in Sweden, housing prices have risen an incredible 32% since 2019, while in the Netherlands, they have increased by 40%. It is precisely because of the imbalance between debt and income, as well as unsustainable price growth, that The Economist recently raised the alarm. "The collapse of the real estate market and recessions that precede such debt accumulation are usually more severe. Given that central banks are now raising rates at nearly the fastest pace in the last four decades, countries burdened with mortgage debt will once again face unpleasant consequences."

Good news

Here in Spain, the real estate market, which experienced one of the toughest 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 broader market, making it one of the most resilient in Europe. Household debt is now less than half of what it is in Sweden and the Netherlands.

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In fact, it has decreased by 50% from 2010 to 2020 and is just over 100% of net disposable income. Moreover, as the market began to recover in 2015 after the crisis, when prices fell by 37%, Spaniards started switching to fixed-rate mortgages. This has guaranteed them protection from the fluctuations in interest rates that we are witnessing today. Currently, about 72% of mortgages have a fixed rate, compared to nearly 100% of variable-rate mortgages just before the crash. In contrast, in Finland, 96% of new mortgage loans have variable interest rates, while in Sweden, it's 48% of new loans. Additionally, Spanish prices have still not fully recovered from the last crisis and are generally still significantly below the peak of 2007. Even with the post-coronavirus recovery, prices have only increased by 5.5%. In other words, Swedish housing prices have risen six times more. There is a consensus that price growth in Spain will slow down over the next two years as economic issues are resolved. There is also agreement that Spain will thrive more than most other countries. However, it is unclear what exactly this means. Bankinter believes that prices will fall 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 decline in prices, considering that ING expects inflation to decrease to 4.4% in 2023, which is a drop of 3.4%. In any case, this is better than the average price drop of 9% that the European Central Bank expects for the eurozone as a whole. In the UK, market analysts expect housing prices to fall by 5-10% just next year. Thus, the Spanish real estate market has a more favorable structural position than most countries in Europe. Other factors should also be taken into account. For example, it is likely that Spanish interest rates will remain significantly lower than in other jurisdictions, likely around 3.6% for fixed rates and 4.1% for variable rates, before stabilizing (according to ING). Compared to fixed mortgage rates in Sweden, which exceed 5%, and rates in the UK, which will also remain between 5 and 6% over the next two years, Spanish money is becoming cheaper for borrowers from these two countries, and more affordable housing and mortgages in Spain may be an alternative to the more unstable markets back home. Let's hope for that. It is also good that the Junta has made the region a more attractive destination by abolishing the property tax that penalized foreigners who owned 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 less impact compared to Northern Europe. And while yes, price growth will slow down, we are unlikely to see a significant decline. Stability and sunshine are my main takeaways this year!