The Spanish housing market is contracting, and a soft landing maneuver is possible.

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The Spanish real estate market has recently experienced a significant decline.

However, despite the sharp rise in interest rates, there are enough mitigating factors that make a soft landing scenario likely. We forecast a 1% increase in the average price this year and 0% next year.

The Spanish real estate market is experiencing a 21% drop in sales in April.

The Spanish real estate market has recently slowed down significantly, and several factors are contributing to the decline in demand for property. Rising interest rates, tightening credit conditions, and global economic uncertainty, including geopolitical instability, are all reducing the demand for housing. In April, the demand for mortgages fell below its five-year average for the first time, and the number of transactions also showed a clear downward trend in the early months of this year. Recent data from notaries, which usually precede official statistics, indicate that this decline is likely to continue in the coming months. According to the General Council of Notaries, home sales dropped by 21% in April compared to the same period last year, while the number of mortgage loans for home purchases decreased by 32% compared to last year. However, the decline is much less significant than in other countries, where the demand for mortgages has fallen even more sharply. This can be partially explained by the increased interest from foreign buyers following the lifting of restrictions imposed due to Covid in 2020 and 2021. A lack of property also remains a problem. In recent years, demand has exceeded supply, slowing the decline in demand. Moreover, the Spanish economy has performed better than the eurozone average, thanks to a revival in tourism, which also supports the real estate market.

The rise in housing prices is hitting a dead end.

Due to the decrease in demand in the Spanish real estate market, there is a slowdown in price growth. With the number of potential buyers decreasing, sellers are facing tougher competition, which is leading to a reduction in pricing strategies. While the growth in housing prices peaked at 8.5% year-on-year in the first quarter of 2022, according to Eurostat data, it dropped to 3.5% in the first quarter of this year. Other price indicators, such as TINSA, also show a clear decline.

The rise in interest rates threatens housing affordability.

Over the past year, the sharp increase in interest rates has put significant pressure on the purchasing power of potential homebuyers, making it difficult to buy a home or obtain a mortgage at current prices. According to calculations by the Bank of Spain, affordability has significantly decreased over the last year. The bank regularly assesses the percentage of income that an average family would need to spend if they were to buy a home with a loan covering 80% of the property's value. These calculations show a noticeable deterioration in property affordability. At the beginning of 2022, families had to spend only 30% of their income on loan repayments, but by the end of the year, that figure had risen to over 36%.

In the coming months, we expect even greater growth in interest rates.

This could create additional pressure on housing availability and further reduce mortgage demand by the end of this year. While a noticeable slowdown is expected, several factors also lower the likelihood of a serious price correction or a sharp market crash. First, the decrease in energy costs reduces uncertainty for households and frees up additional budget that can be spent on monthly mortgage payments. Second, incomes will continue to grow. Nominal wage growth will accelerate after a sharp decline in real purchasing power in 2022. Additionally, low unemployment ensures steady growth in gross national income. The combination of rising nominal incomes and a tight labor market will provide some support for real estate demand. Finally, despite the current temporary downturn, demand will continue to grow structurally in the coming years.

Weak price growth in 2023 and 2024.

We have updated our forecast for the current year and now anticipate a price increase of 1%, which is an increase from our previous estimate of 0%. This change is explained by the ongoing rise in real estate prices at the beginning of the year, although at a slower pace. Our price forecast suggests a slight decrease in prices in the second half of this year. For 2024, we have lowered our forecast to 0% from our previous estimate of 1%, as we expect that the continuing rise in interest rates will dampen any recovery in the real estate market next year. Overall, this scenario suggests a soft landing for the Spanish housing market. While there is a risk of a slight price decline in the second half of this year, the overall price correction will remain moderate in nominal terms. However, it is important to note that the correction in real terms will be significantly higher due to high inflation. A slight price decrease of about 2.5% - 3% is expected in 2023 and 2024. Over three years, the accumulated real price correction will exceed 6%.