Spanish real estate market: is a correction approaching?

Housing prices in Spain continue to rise, although the peak has already passed. In the second quarter of 2022, they increased by 8% compared to the same period last year. Although the growth has slowed down compared to the first quarter, it still significantly exceeds the historical average.

Prices for new and existing housing show similar trends, although the former has increased slightly more (+8.8% year-on-year) than the latter (+7.9% year-on-year). Data from Tinsa, which includes monthly figures and correlates well with the quarterly INE index, indicate a weakening trend during the summer. In July, housing prices in Spain continued to rise by 3% month-on-month, but then slowed to 0.5% in September.

The beginning of the COVID-19 pandemic accelerated the rise in housing prices in many countries. Since the start of 2020, prices for existing homes in Spain have increased by 11.5%. This is slightly weaker than the price growth in Portugal (+26.2%) and France (+15.5%), but stronger than in Italy, where prices have risen by 7.2% since the beginning of the pandemic. This strong price dynamic during the pandemic has led to a significant decrease in housing affordability. Combined with rising mortgage rates, worsening economic prospects, and high inflation that reduces the purchasing power of the population, the real estate market will continue to cool down.

Predictions for the future

We expect price growth to reach 7% in 2022, but slow down to 1% next year. This means that nominal price growth will not be able to keep up with inflation. With an expected inflation rate of 8.7% this year, real price growth will turn negative at -1.7%. With an expected inflation rate of 4.4%, real price growth in 2023 will also be negative at -3.4%. See Fig. 1. Housing Price Index, % YoY INE, ING Research

Regional differences

The rise in prices is starting to slow down everywhere except for the capital regions. Although housing prices have sharply increased almost throughout Spain, the dynamics vary across different regions and cities. The latest data from Tinsa for September shows that the price growth is beginning to slow down everywhere except for the capital areas. The slowdown in price growth has been most pronounced on the Mediterranean coast and in the Balearic and Canary Islands. The price increase on the Mediterranean coast is at 6.5%, and in the Balearic and Canary Islands, it is at 3.5%, which is significantly lower than the national average. In the islands, in particular, the growth in housing prices has completely halted this year, even slightly decreasing over the summer. However, this slowdown comes after a strong price increase at the beginning of the pandemic. In contrast, in the capital regions, price growth is still continuing without pause. While housing prices in the rest of Spain have decreased by an average of 0.4% compared to August, in the capital regions, they have still risen by 1.2% in just one month, leading to an overall annual growth rate of 10.0% in September. See Fig. 2. Housing price index, % y/y, September '22 Tinsa, ING research

Mortgage rates

The rise in mortgage rates is hindering future growth in housing prices. Mortgage rates have already sharply increased since the beginning of the year, and it is unlikely that we have reached a peak. Mortgage rates closely follow the developments of the 1-year Euribor with a slight delay. The 1-year Euribor has started to rise sharply. While the Euribor was still negative at -0.5 on January 1, it rose to 2.7 in October. Although the 1-year Euribor had already anticipated an increase in interest rates by the European Central Bank (ECB) to combat inflation, further rate hikes may again put some pressure on the Euribor in the coming months. Nevertheless, we expect the Euribor to peak by the end of the year. If the eurozone enters a recession, the ECB's willingness to further raise interest rates will also decrease. Mortgage rates, which have also risen sharply this year, are likely to follow this trend. The gap between the Euribor and mortgage rates has recently narrowed significantly, indicating that mortgage rates have not yet caught up. However, the greatest risk of increase remains with floating rates.

Fixed interest rates

The growing popularity of fixed interest rates continues. In the past, almost all mortgage loans had floating rates, but the number of new fixed-rate mortgages has been rapidly increasing since 2015. According to INE data, before 2015, the share of new fixed-rate mortgages was less than 5%, and since 2021, it has accounted for more than half of all loans. Many homeowners in Spain have taken advantage of low interest rates in recent years to lock in their borrowing costs. The prospect of further interest rate hikes by the ECB and increasing uncertainty have accelerated this trend. In July, three out of four mortgages were fixed-rate, which protects households from sharp increases in interest rates and maintains the stability of their monthly payments. This supports their creditworthiness and reduces risks for the banking sector. Despite the popularity of fixed rates, floating rates still make up the overwhelming majority of all mortgage loans. See Fig. 4. The share of housing mortgages with fixed and floating rates INE, ING studies.

Volume of transactions and mortgage production

Data on transactions remains stable, but we expect a slowdown in the pace. The published INE sales data for August does not (yet) show a weakening in the number of transactions. The number of transactions in August 2022 was still almost 15% higher than in the same month last year, which was already an exceptionally strong year in terms of transaction volume. Compared to the pre-crisis period, the number of transactions in August is still 60% and 28% higher than in August 2019 and 2018, respectively. In the coming quarters, we expect the beginning of a decline in the number of transactions. The cost of living crisis is putting significant pressure on real disposable income, combined with rapidly rising mortgage interest rates and weakening economic growth, which creates serious obstacles for the real estate market. We expect the Spanish economy to enter a moderate recession starting from the fourth quarter and beyond. See Fig. 5. Number of transactions, 2019-August 2022 INE, ING research.

Mortgage production is still significantly higher than before the pandemic. In the first eight months of this year, there were 14% more mortgage loans issued than in the same period last year, and 2021 was already a strong year for mortgage production. Compared to 2019, the year before COVID-19, the number of new mortgage loans in 2022 increased by 24%. In August, the most recent month for which data is available, the number of new mortgage loans was still 10.9% higher than in the same month last year. It is likely that many homeowners took advantage of low interest rates in the first half of the year to refinance their existing mortgages to a fixed rate. Potential homebuyers probably also tried to beat the rise in interest rates by accelerating the home-buying process. Both factors contributed to the increase in mortgage production in the first half of the year, but this effect will gradually diminish. Moreover, deteriorating household sentiment and less favorable credit conditions will reduce demand for real estate and put pressure on mortgage production. Consumer confidence has significantly declined in recent months, indicating that households are increasingly worried about high inflation amid economic uncertainty. Consumer confidence has now fallen below the level recorded at the beginning of the pandemic and is at its lowest point in the last 10 years. This may prompt potential homebuyers to delay their purchasing decisions in the coming months.