Author: Cristina Montalvo, Madrid

Source: niusdiarios.es

The lack of available new housing stock will continue to drive prices up in the coming months. Experts do not rule out price adjustments in the used housing market due to a drop in demand.

The European Central Bank’s interest rate hikes, which have led to the fastest increase in Euribor history, are already translating into a decrease in real estate transactions. At least, this is the view of Sociedad de Tasación, which, in its latest report on the residential market in Spain, has noted a decline in real estate activity in recent months.

“The number of transactions is falling, and so is the number of mortgages. Since November, there has been a considerable drop in housing demand,” warns Juan Fernández-Aceytuno, CEO of the firm, who also points to a market cycle change as a cause of the slowdown.

The increase in mortgage rates is even leading to the suspension of sales that had been completed months ago on plans or for which deposits had been paid. “Someone who bought two years ago with interest rates at 0.8% might now find they cannot afford the payments if rates have risen to 4%.”

This increase in financing costs, with conditions tougher than a few months ago, combined with the loss of purchasing power due to inflation, is creating a new real estate scenario that experts agree will lead to a decrease in demand.

However, the impact of this trend on prices will not be uniform across all properties. According to Sociedad de Tasación, potential adjustments will focus on second-hand homes, while new construction prices will continue to rise.

“In a time of declining demand, prices need to be adjusted. The duration of the decline will depend on how long this situation lasts, how employment evolves, and the negotiating power of buyers and sellers, but it is clear that the market has changed.”

Adjustments in Used Homes

Despite the circumstances, economic uncertainty, and the rise in Euribor, the real estate market experienced significant dynamism last year, leading to substantial price increases. According to ST, housing prices increased by 3% last year, a figure significantly lower than estimates by other sector firms. For instance, Pisos.com reports a 5.6% increase in 2022, while Fotocasa estimates a 7.5% rise.

“Contrary to what might be expected, since the ECB started raising rates in the summer, prices began to increase, gaining momentum from August and ending December with the largest rise seen in 17 years. This is explained by the fact that there is still demand, especially from small savers, who have accelerated their purchasing decisions and want to secure mortgage conditions they still find relatively attractive,” explains María Matos, Director of Studies at Fotocasa.

After this temporary effect caused by the rate hikes, experts assume that inflation will eventually moderate consumption and lead to a relaxation of demand in the coming months. “We might see price decreases, but they will not be very significant. It doesn’t make sense for prices to fall too much because, on average, they are still 30% below the peaks reached during the housing bubble. The declines will be modest, as there is such an imbalance between supply and demand that a market slowdown will not be enough to see significant price drops.”

Ferran Font, Director of Studies at Pisos.com, agrees with this diagnosis, believing that after last year’s strong sales increase (with preliminary figures suggesting 640,000 transactions), the market will tend to normalize in 2023.

“This year we might see a reduction in transactions of between 10% and 15%. We will move towards a more moderate and sustainable scenario; more normalized, also regarding interest rates,” he predicts.

With these forecasts, he estimates that price increases will be more contained compared to last year, with rises expected to be between 1% and 2%, but with significant variation depending on areas and types of homes. “In some markets, we might see price drops in rural areas, secondary markets, and medium-sized cities… But in large cities, with more attractive markets, significant price reductions are unlikely, as there is not a very large supply.”

New Homes Will Continue to Rise

What all real estate experts agree on is that the factors driving prices down, initially demand and then prices for second-hand homes, will not have the same effect on new construction properties.

“We can be sure that price increases will continue due to the low levels of new housing production. We have been underproducing homes for 14 years, and this segment may face a serious pricing problem if demand remains strong,” predicts Matos, who explains that the characteristics of this segment (sustainability, open spaces, common area amenities, abundant light) align with what buyers are looking for post-pandemic.

Sociedad de Tasación also expects prices to rise as the stock of new homes available in the market is insufficient to meet current demand. They point out that last year, 100,000 new housing permits were granted, compared to nearly 650,000 in 2007. In other words, construction is five times lower than 15 years ago.

In addition to the lack of supply, Pisos.com also cites the type of buyer for new construction homes—investors or buyers with strong purchasing power, for whom current economic conditions have less impact—as a reason for maintaining the upward price trend.