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Spain house price crash: Bleak outlook fuels real-term decline as rate hikes dent prospects

By Nicole Willing

Edited by Jekaterina Drozdovica

16:14, 7 October 2022

Canarian style houses in the resort town of Orihuela, La Zenia, Spain.
Bleak outlook fuels real-term decline as rate hikes dent prospects Photo: Mark_studio / Shutterstock

Housing sales in Spain in the first half of 2022 reached their highest level since the 2007 property boom that preceded the global financial crisis. But the boom in house prices that has been underway since the start of the Covid-19 pandemic has shown signs of slowing in recent months, with rising interest rates rapidly increasing the cost of mortgages.

Will real estate face a similar fate to equities and other risk assets, as investors weigh the prospects for a global recession? Here we take a look at what the slowdown could mean for the Spanish property market and the likelihood of a Spain house price crash.

Housing crash explained

Housing prices tend to rise and fall in cycles, with peaks or bubbles – when average house prices exceed their fundamental value – ending in a cooling of the market. Sometimes the cooldown is rapid and house prices collapse – or crash – very quickly.

Housing bubbles can occur through excessive lending that results in homeowners taking on mortgages they cannot afford. When the market turns, these homeowners can be forced to sell their property, increasing the supply of houses on the market. 

The real estate market in Spain is an attractive investment destination for European property buyers looking for a home in the sun, with the Balearic Islands among the top areas for sales. 

The Spanish property market has seen three previous price bubbles: 1985-1991, when average prices almost tripled; 1992-1996; and 1996-2008, which ended with the 2007-2008 financial crisis and a sharp Spain house price crash.

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What caused the bubbles to burst?

Spanish government policy in the 1960s and 1970s encouraged homebuyers supporting strong long-term price growth, with the homeownership rate amounting to around 80% in 2007. 

According to a Banco de Espana (BDE) report, average Spanish house prices between 1976 and 2003 increased by sixteen-fold in nominal terms and doubled in real terms. That put Spain among the top three or four Organisation for Economic Co-operation and Development (OECD) countries with the highest long-term real growth in house prices.

The US property bubble burst in August 2007 with the subprime mortgage crisis and contagion quickly spread to other property markets, putting an end to the Spanish real estate bubble. The Spain housing market crash saw prices plummet by 37% from 2007 to 2013. CaixaBank explained:

“Generally speaking, a weakness in the housing market begins to manifest itself with an increase in the time it takes to sell a home and a decrease in the number of sales (deceleration zone), which then translates into a moderation or even a drop in prices after a few quarters (contraction zone). The more imbalances that have accumulated during the preceding expansionary phase, the deeper and longer-lasting this phase of adjustment in the market tends to be.”

According to the bank, this was the key reason behind the long and intense recessive phase from 2009 to 2013. “In contract, in 2020 the real estate sector suffered a temporary adjustment due to the mobility restrictions associated with the pandemic.”

Property sales in Spain plummeted by 16.9% in 2020, National Institute of Statistics (INE) showed, as Covid-19 lockdowns disrupted the market. But the market boomed again in 2021, particularly in coastal regions and less built-up areas, with sales soaring by 34.8% from 2020. 

In the first half of 2022, sales climbed by 23.1%, their highest level since the 2007 Spanish property bubble. The number of foreign property buyers reached a record in the second quarter.

However, the INE data indicates that total Spanish property sales peaked in May, with the pace of sales slowing in June and July. Property sales in July were up by 8% year on year compared with a 31% rise in January.

Meanwhile, the housing prices in the country, as compiled by Ministerio de Fomento’s house price index, are still to recover 2007-2008 highs, TradingEconomics data showed. However, the Spanish homes’ value has been increasing consistently since 2015, only slowed down briefly by the pandemic in 2020, and as of October 2022 stood at a 10-year high.

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House price index in Spain, 2000 - 2022

Yet as the European Central Bank (ECB) raised interest rates out of negative territory in July for the first time since 2011, followed by a 75-basis point hike in September, and with more rate rises expected to come, mortgage rates are climbing fast. 

Around 50% of property sales in Spain include mortgage financing, but could the rapid rise in borrowing costs and continued high inflation result in a Spanish housing market crash?

Spain house price crash: Is there potential for a price collapse?

According to analysis on European housing markets by S&P Global Ratings, there is a “confluence of factors” that keep the housing demand elevated. Among these are record-high employment, rising wages, working-from-home trend and cash saved during the pandemic. The firm added:

“Households are also still benefiting from years of accommodative monetary policies, which culminated in the emergency measures taken by central banks at the time of the pandemic. Still, while some of these demand factors are still at play, it is likely to be dulled by monetary policy normalization now under way at a faster pace than expected some months ago on the back of persistently high inflation. Higher interest rates could lead demand for housing to cool down.”

The ratings agency predicted that house prices in Spain will rise by an average of 4% in 2023, down from 4.6% in 2022, with the growth rate slowing to 3.5% in 2024 and 3.2% in 2025. The firm said a hard landing for the European home prices is unlikely due to the “combination of higher interest rates in nominal but not in real terms, strong household balance sheets, and displacement of people due to war.”

“We therefore expect prices to cool down next year and further in the years to come,” the agency’s analysts stated, noting that the inflow of refugees from Ukraine – around 120,000 to Spain as of the end of June – is adding to demand for housing in Europe.

Spanish financial services company Bankinter forecast at the end of September that Spanish house prices will fall by around 5% over the next two years after rising by an estimated 5% in 2022. The firm has revised its forecast for 2023 to a 3% decline, compared with a previous forecast for 1% growth, with the market now expected to fall by 2% in 2024 from a previous forecast of 0%.

Meanwhile, analysis by Spanish Property Insight noted that a Spain house price crash - as it happened in 2008 - is unlikely. They said:

“Even if the post-pandemic Spanish housing boom does run out of steam this year, there is no reason to expect a crash like the end of the last boom in 2007. It will, however, get more difficult to sell property in Spain against a backdrop of recession, rising interest rates, and high inflation.”

Analysts at Spanish financial services company CaixaBank also do not expect an imminent Spain house price crash, pointing out that the current economic context and market dynamics are very different from 2008:

“The strength of demand is largely being driven by changes in post-pandemic preferences and the fact that some of the savings accumulated during the pandemic are being channelled into the real estate sector. Moreover, the balance sheets of both households and the financial sector are now much healthier, and there is no excess supply.”

The bank, however, still expected a slowdown in Spanish housing prices amid soaring inflation that wipes out households’ purchasing power and triggers monetary policy tightening. 

“For 2023, however, we expect inflation will begin to moderate, and this should allow interest rates to remain contained in historical terms. All this should help to ensure that the adjustment in the Spanish real estate market will be limited…. In particular, we anticipate that the number of sale transactions will fall by just over 10% in 2023, while home prices will register a significant slowdown but maintain a positive growth rate.”

The bottom line

Ultimately, whether there is another Spain real estate crash will depend on the extent of the interest rate hike cycle and its impact on mortgage rates. While a Spain property crash would make prices cheaper for buyers, high inflation and rising interest rates will reduce mortgage affordability.

Remember, analyst price predictions can be wrong. Always conduct your own due diligence before trading, and never trade money you cannot afford to lose. 

FAQs

When was the last property crash in Spain?

Property prices in Spain last crashed during the 2007-2008 financial crisis that was triggered by the turbulence in the subprime mortgage market.

Is Spain in a housing bubble?

The housing prices in the country, as compiled by Ministerio de Fomento’s house price index, are still to recover 2007-2008 highs, TradingEconomics data showed. The Spanish homes’ value has increased consistently since 2015, only slowed down briefly by the pandemic in 2020, and currency stands at a 10-year high. 

Are house prices in Spain falling?

TradingEconomics data showed that house price in Spain has been increasing consistently since 2015, only slowed down briefly by the pandemic in 2020, and as of October 2022 stood at a decade-high.

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The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
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