Real Estate Market in Spain: Is a Correction Looming?

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Housing prices have sharply increased in almost all of Spain.

In the second quarter of 2022, property prices in Spain rose again by 8.0% compared to the previous year. The increase in mortgage rates and a weakening economic outlook will curb price growth from the expected 7% this year to 1% in 2023.

The strong rise in prices continues, although we have already passed the peak. Prices for Spanish homes increased by 8.0% in the second quarter compared to the same period last year, which is slightly less than in the first quarter of 2022, but the price growth still significantly exceeds the historical average. Quarter-on-quarter, prices rose by 1.9% in the second quarter compared to 2.6% in the first quarter. New and existing apartments showed similar trends, although the former increased slightly more (+8.8% year-on-year) compared to the latter (+7.9% year-on-year). Data from the company Tinsa, which includes a monthly profile and correlates well with the quarterly INE index, show a weakening trend in the summer. In July, prices for Spanish homes were still rising by 3% month-on-month, but then slowed to a growth of 0.5% in September. The onset of the COVID-19 pandemic accelerated the rise in property prices in many countries. Since the beginning 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 start of the pandemic. This strong price dynamic during the pandemic has stretched affordability to its limits. Combined with rising mortgage rates, worsening economic prospects, and high inflation undermining household purchasing power, the real estate market will continue to cool down. 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 pace with inflation. With the current expected inflation rate of 8.7% for 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%.

Price growth is starting to slow down everywhere except in the megacities.

Although housing prices have sharply increased in almost all of Spain, the dynamics vary across different regions and cities. The latest data from Tinsa for September shows that price growth is beginning to slow down everywhere except in the metropolitan areas. The most significant slowdown in prices occurred on the Mediterranean coast and in the Balearic and Canary Islands. Price growth on the Mediterranean coast was 6.5%, while in the Balearic and Canary Islands it was 3.5%, which is significantly lower than the national average. Particularly in the islands, the increase in real estate prices has stalled this year and even slightly decreased during the summer. However, this slowdown comes after a strong price increase at the beginning of the pandemic. In contrast, in the metropolitan areas, price growth continues unabated. While housing prices in the rest of Spain have decreased by an average of 0.4% compared to August, in the metropolitan areas they still rose by 1.2% in just one month, leading to an overall annual growth rate of 10.0% in September.

The rise in mortgage rates is hindering future price growth.

Mortgage rates have already risen sharply since the beginning of the year, and it is unlikely that we have reached the peak. Mortgage rates closely follow the development of the 1-year Euribor with a slight delay. The 1-year Euribor has started to rise sharply. While on January 1, the Euribor was still negative at -0.5, by October it had risen to 2.7. Although the 1-year Euribor had already anticipated an increase in 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.

The growing popularity of fixed interest rates continues.

In the past, almost all mortgage loans had variable rates, but since 2015, the share of new fixed-rate mortgages has been growing rapidly. According to INE data, before 2015, the share of new fixed-rate mortgages was less than 5%, while since 2021, they have accounted for more than half of all loans. Many Spanish property owners have taken advantage of low interest rates in recent years to secure 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, as their monthly payment burden remains stable. This maintains their solvency and reduces risks for the banking sector. Despite the popularity of fixed rates, variable rates still make up the majority of the total volume of mortgage loans.

The data on transactions remains stable, but we expect a slowdown in the pace.

The sales data for August, recently published by INE, 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 for transactions. Compared to the pre-COVID 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 to see 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 slip into a moderate recession starting in the fourth quarter.

The production of mortgage loans is still significantly above pre-COVID levels.

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 lending. Compared to 2019, the year before COVID-19, the number of new mortgage loans in 2022 is 24% higher. In August, the last 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 fixed rates. Potential buyers may also have been trying to beat the rise in interest rates by accelerating their property purchases. Both factors contributed to the increase in mortgage lending in the first half of the year, but this effect is gradually diminishing. Additionally, rising household pessimism and less favorable credit conditions will reduce demand for real estate and put pressure on mortgage lending volumes. Consumer confidence has significantly declined in recent months, indicating growing concerns among households about high inflation amid economic uncertainty. Consumer confidence has now fallen below the low levels seen at the beginning of the pandemic and is currently at its lowest point in the last 10 years. This may lead potential buyers to postpone their purchasing decisions in the coming months. The latest survey by the European Commission, which assesses the intentions of Spaniards to buy housing in the next 12 months, is still holding strong.