The Spanish real estate market suffers a 21% drop in sales in April
The Spanish real estate market has recently entered into a clear slowdown, and several factors contribute to the reduction in demand for real estate. Rising interest rates, tightening credit conditions, and global economic uncertainties, including geopolitical instability, have dampened housing demand. In April, mortgage demand fell below its five-year average for the first time and the number of transactions also showed a clear downward trend in the first months of this year. The latest figures from notaries, which are usually higher than the official ones, suggest that this crisis will probably continue in the coming months. According to the General Council of Notaries, the sale of homes fell 21% in April compared to the same period last year, while the number of mortgage loans to buy a home fell 32% year-on-year.
However, the slowdown is much less severe than in other countries, where mortgage demand has fallen even more sharply. This can be partly attributed to increased interest from foreign buyers following the relaxation of Covid restrictions in 2020 and 2021. Property shortages also remain a persistent problem. Demand has outstripped supply in recent years, halting the slowdown in demand. In addition, the Spanish economy has performed better than the eurozone average, helped by a rebound in tourism, which has also supported the property market.
House price growth stalls
Due to the drop in demand in the Spanish property market, there has been a marked slowdown in price growth. With a reduced number of potential buyers, sellers face fiercer competition, resulting in reduced pricing power. While house price growth peaked at 8.5% year-on-year in the first quarter of 2022, according to Eurostat, it fell to 3.5% in the first quarter of this year. Other price followers such as TINSA also show a clear downward movement.
House prices in Spain, in % year-on-year
Rising interest rates challenge housing affordability
Over the past year, sharply rising interest rates have put significant pressure on the purchasing power of prospective homebuyers, making it difficult for prospective buyers to purchase a home or qualify for a home loan at the price levels current. According to calculations by the National Bank of Spain, affordability has fallen significantly over the last year. The bank periodically assesses the percentage of income that an average household would have to spend if buying a house with an 80% loan. These calculations show a marked deterioration in property affordability. At the beginning of 2022, households only needed to spend 30% of their income to repay loans, but by the fourth quarter of that year, this percentage had risen to more than 36%.
Although wages are picking up, interest rates rose further in the first half of 2023, likely worsening housing affordability. Affordability will continue to come under heavy pressure in the second half of the year due to further interest rate increases.
Housing affordability has worsened significantly over the past year
Based on current trends, it appears that interest rates have not peaked yet.
In the coming months, we expect further interest rate increases, which could put further pressure on affordability. The benchmark 12-month Euribor interest rate, which guides mortgage rates, is expected to rise further, although interest rates are believed to be near their peak. The European Central Bank (ECB) has already hinted at a 25 basis point rate hike at its next meeting in July. Recent tough statements by some ECB members seem to indicate that one or more rate hikes will follow after the summer. This will put additional upward pressure on the Euribor. On top of that, mortgage rates have yet to recover after the rapid rise in Euribor.
Based on current trends, mortgage rates will continue to rise in the coming months. We expect the average floating rate (with a fixed rate period of up to five years) for mortgages to potentially peak at 5% in the second half of this year. This projection reflects a significant increase from the 3.9% rate recorded in April 2023.
The upside potential of fixed interest rates is even greater. Currently, there is an outlier scenario where floating rates are superior to fixed rates. This suggests that fixed interest rates have even more room to rise and outperform floating rates again.
Evolution of interest rates on mortgage loans and Euribor 12M
A sharp market decline seems ruled out
All indicators point to a substantial slowdown in the housing market this year. A further rise in interest rates will continue to put pressure on affordability and further curb demand for mortgages later this year. While a marked slowdown is expected, several factors are also reducing the likelihood of a severe price correction or market crash.
First, falling energy costs reduce uncertainty for households and free up additional budget that can be spent on monthly mortgage payments. Second, revenue will continue to increase. Nominal wage growth will pick up after the sharp decline in real purchasing power in 2022. Furthermore, low unemployment ensures steady growth in gross national income. The combination of rising nominal incomes and a tight labor market will provide some support to housing market demand.
Finally, despite this current temporary drop, demand will continue to grow structurally in the coming years. Slower supply growth will create shortages in the market, putting upward pressure on prices.
Weak price growth in 2023 and 2024
We have updated our forecast for the current year and now assume 1% price growth, which is an upward revision from our previous estimate of 0%. This revision is due to continued growth in house prices at the beginning of the year, albeit at a slower pace. Our price forecast assumes a slight drop in prices in the second half of this year. For 2024, we have revised our forecast down to 0% from our previous estimate of 1%, as we expect the continued rise in interest rates to dampen any recovery in the property market next year.
In general, this scenario foresees a soft landing for the Spanish property market. Although there is a risk of a slight price decline in the second half of this year, the overall price correction will remain modest in nominal terms. However, it is important to note that the correction in real terms will be significantly higher due to the impact of high inflation. Inflation-adjusted prices fell slightly last year and we expect further declines of around 2.5% to 3% in 2023 and 2024. Over a three-year period, the cumulative real price adjustment is expected to exceed 6%.
Evolution of Spanish house prices, including the ING forecast