Span real estate market shrinks, but smooth transition likely

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Spain's 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 fall scenario likely. We forecast average annual price growth of 1% this year and 0% next year.

Spain's real estate market recorded a 21% decline in sales in April.

Real estate in Spain has recently slowed down and several factors are contributing to the decline in demand for real estate. Rising interest rates, tighter lending conditions and global economic uncertainty, including geopolitical instability, are all holding back housing demand. In April, mortgage demand fell below the five-year average for the first time, while the number of transactions also showed a clear downward trend in the first few months of this year. The latest figures from notaries, which are usually ahead of official data, suggest that this downturn is likely to continue in the coming months. According to the General Council of Notaries, home sales were down 21% in April compared to the same period last year, and the number of home mortgages fell 32% on a year-over-year basis. However, the decline is much smaller than elsewhere in the country, where demand for mortgages has fallen even more sharply. This can be partly attributed to increased interest from foreign buyers following the lifting of restrictions due to Covid in 2020 and 2021. The shortage of real estate also remains a persistent problem. In recent years, demand has outstripped supply, slowing the slump in demand. Moreover, Spain's economy is performing better than the eurozone average thanks to a recovery in tourism, which is also supporting the real estate market.

Home price growth is stopping.

Due to lower demand, the Spanish real estate market is experiencing a slowdown in price growth. With a reduced number of potential buyers, sellers are facing stiffer competition, resulting in lower pricing. While house price growth peaked at 8.5% on an annualized basis in the first quarter of 2022, according to Eurostat, it fell to 3.5% in the first quarter of this year. Other price-tracking indices such as TINSA also show a clear decline.

Rising interest rates are creating problems for housing affordability.

Over the past year, the sharp rise 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 loan at current price levels.

Slowing price growth in 2023 and 2024.

We have updated our forecast for the current year and now assume price growth of 1%, an upward revision from our previous estimate of 0%. This adjustment is driven by continued house price growth at the start of the year, albeit at a slower pace. Our price forecast assumes a slight decline 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 continued interest rate increases to slow the recovery in the real estate market next year. Overall, this scenario assumes a mild decline in the Spanish real estate market. Despite the risk of a slight decline in prices in the second half of the 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 much higher due to high inflation. Prices per inflation fell slightly last year, and we expect a further decline of 2.5% to 3% in 2023 and 2024. Over three years, the cumulative price correction in real terms will exceed 6%.