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Spanish Housing Market Defies Eurozone Trends

In stark contrast to many other eurozone countries, the Spanish real estate market continues its upward trajectory. Despite the adverse effects of climbing interest rates, the demand for properties remains steadfast. This, coupled with inadequate supply, is the primary driving force behind the surging property prices.

Resilient Amidst Rising Interest Rates In September, Spanish house prices surged by 2.1% on a quarterly basis, as reported by Eurostat

This growth significantly outpaces the meager 0.1% quarterly increase observed in the broader eurozone. In contrast, countries like Germany, France, and the Netherlands experienced a decline in house prices during the second quarter. Examining the year-on-year perspective, Spanish property values soared by 3.7%, while the eurozone saw an average decrease of 1.7%. Thus, despite the considerable hike in mortgage rates, Spanish real estate prices persist in their ascent, standing out in stark contrast to the rest of the eurozone.

Sustained Property Demand In Spain

The soaring interest rates on mortgage loans have posed a challenge for the property market. The data from the Spanish statistical service INE reveals that, in July 2023, the number of mortgage loans granted was 18.6% lower compared to the same month in the previous year. Moreover, property transactions cooled off by 10.1% in July, in contrast to the previous year. Nevertheless, the downturn in Spain is less severe than in other countries. Several factors differentiate the Spanish property market, with robust demand being the foremost distinguishing factor.

Several elements underpin this high demand for housing

The growth of Spanish households, partly attributed to immigration, is on an upward trajectory. Furthermore, the Spanish property market enjoys stronger economic growth compared to the eurozone average. According to our forecasts, the Spanish economy is expected to expand by 2.5% in 2023, while the eurozone is anticipated to experience a modest 0.5% growth. This more resilient economy has also managed to reduce unemployment rates more effectively than the rest of the eurozone, albeit it still surpasses the regional average. The combination of higher nominal wage growth and lower inflation has resulted in a return to positive real wage growth, thereby increasing the purchasing power of Spanish households. With these factors in play, many families who saved substantially during the pandemic are now investing those savings in real estate.

Foreign interest in Spanish property has also been a key driver of rising house prices

Although foreign demand dwindled during the pandemic due to travel restrictions, it has now fully rebounded. This resurgence explains why house price growth in tourist regions such as the Balearic and Canary Islands, as well as the Mediterranean region, surpasses the national average. With the strong revival of tourism after the pandemic, more property owners are retaining their properties for tourist rentals, further tightening the property market.

Inadequate Supply 

An essential factor in boosting property prices is the insufficiency of supply to match growing demand. Net household growth outpaces net supply growth, creating a scarcity that pushes house prices higher. This is not a recent development, as the growth in Spanish supply has lagged behind demand for several years. The drop in foreign demand during the pandemic and the higher number of inheritances due to COVID-19 fatalities provided some relief during that period.

The number of construction projects dwindled during the pandemic due to restrictions, and subsequently, the surge in interest rates and rising building material costs further slowed the development. There are no immediate expectations for lower interest rates or reduced construction material costs. The European Central Bank (ECB) has made it clear that it intends to maintain high interest rates for an extended period, with any rate cuts not expected before the summer of 2024. Building costs are also expected to remain elevated. While the prices of most construction materials have somewhat stabilized over the past year, construction expenses will still surpass pre-pandemic levels.

A Less Overheated Market 

Another distinguishing factor is that Spanish house prices exhibited a more moderate increase during the pandemic compared to other eurozone countries. This is likely to lead to a more restrained downturn in Spain compared to countries where the property market was excessively heated.

Despite the ongoing price increases, the ECB’s assessment of the Spanish housing market suggests a lower level of overvaluation compared to most major eurozone economies. The ECB conducts quarterly assessments of property market overvaluations across the eurozone, considering various factors such as income growth and interest rate developments. In the first quarter, the ECB estimated overvaluation in the Spanish property market at 10.3%, which is lower than the eurozone average of 12.8%. These figures are notably below the 19.8% in the Netherlands and the 14.8% in Germany, where property prices have significantly retreated from their peak levels. Thus, Spanish overvaluation remains comparatively lower when compared to other nations.

Anticipated Slowdown in Growth 

Despite the resilience of the Spanish property market, several factors are likely to temper the market’s momentum. It is expected that mortgage lending rates will continue to rise through the year’s end and remain elevated for an extended period, further squeezing real estate purchasing power. Additionally, economic growth is anticipated to decelerate during the winter months, which may exert a negative influence on the property market. For 2023, an average GDP growth of 2.5% is forecasted, which is projected to taper to 1.4% in 2024. Accordingly, Spanish house prices are expected to grow by an average of 3% this year and 2% in 2024. When adjusted for inflation, this signifies a marginal correction in real prices.

Will Roberts Mortgage Adviser

Originally from the UK, Will has been based in Barcelona since 2019. He holds a diverse range of financial qualifications and has experience in numerous international roles in the financial sector, along with a managerial position in a FTSE 100 organisation. Fluent in English & Spanish.

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Mortgage Direct, S.L. is a company registered in the Registro de Intermediarios de Crédito Inmobiliario del BdE with the nº D108.

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