Author: Luis Aparicio

Source: Cinco Días

Finding simple answers in these complex economic times is not easy. Deciding whether to buy or rent a home this coming year will depend on personal reasons and, of course, on the economic context in which we find ourselves. The year will be influenced by multiple factors: high inflation, rising interest rates (which will further increase mortgage costs), a shortage of new construction, possible overvaluation of existing properties, a labor market under the pressure of a slowing economy, and wages constrained by rising prices. The household savings rate and the improvement of bonds as an investment alternative to real estate, a much less liquid asset, are other important variables.

In 2022, the real estate market experienced positive growth. It is estimated that the year will end with around 665,000 transactions, representing a 2% increase from 2021, according to forecasts from real estate consultant Atlas Real Estate Analytics. Prices have reflected this demand surge. According to data from Tasaciones Inmobiliarias (Tinsa), the price of housing increased by 8.8% over the year, averaging 1,751 euros per square meter. The largest annual increases are seen in provincial capitals Zaragoza (10.9%), San Sebastián (10.8%), Cádiz (9.3%), Madrid (9.2%), and Las Palmas de Gran Canaria (8.9%). Málaga, Valencia, and Bilbao also registered price increases above 8%, while in Barcelona, a highly pressured market, the increase moderated to 4.7%.

Inflation must be taken into account to contextualize such significant increases, as it stood at 5.8% in December and the annual average was 8.4%. As Miguel Cardoso, Chief Economist at BBVA Research, reminds us, “it is known that between 2008 and 2017, housing prices fell by 37% in real terms. Less known is that they fell by 21% between 1991 and 1997 due to inflation.”

Experts expect that in 2023, housing prices in Spain will either decrease very slightly or stabilize. Bankinter analysts expect a 3% drop next year and a 2% decrease in 2024 (a percentage that should be added to the increase in the cost of living). The ECB also anticipates a 9% decrease in prices over the next two years across the eurozone.

According to Bankinter, factors influencing the price decline will include the higher cost of mortgage financing, lower household savings due to the increased cost of living, and a drop in investment in housing as competitors like bonds offer returns close to 4%, comparable to rental income.

Miguel Cardoso, on the other hand, is optimistic about price stabilization in 2023, with increases between 0% and 5%, though still below inflation. His arguments for a moderate evolution in housing prices are based on labor market stability, a 4.5% increase in family incomes, and the lack of oversupply in the market compared to past times of price collapse.

Luis del Corral, CEO of Foro Consultores Inmobiliarios, also supports the thesis of a stable housing market in 2023: no significant crashes or rises. “It’s important to analyze the market. The supply of new housing is very restricted, and given this limited supply, price pressure will remain. This means that new housing is scarce and expensive. Those needing to buy a house will have to turn to the secondary market. After months of very active sales in this type of housing, there is also less supply and higher prices, although depending on the area, the secondary housing market will tend to stabilize,” he notes.

Examining demand, Del Corral also sees weakness “due to times of uncertainty, reduced income from inflation, and the high cost of mortgage financing as a result of rising interest rates,” he concludes.

In 2022, both purchase and rental prices have risen in tandem, exceeding 8%.

Cristina Arias, Director of the Tinsa Research Department, also observes weakening demand for housing: “The rise in interest rates penalizes buyers who require external financing, as it increases the mortgage payment. Meanwhile, economic slowdown may hinder housing accessibility, increasing uncertainty about borrowers’ ability to pay and making lending criteria stricter. Both factors are complicating home purchases,” she explains.

From the real estate portal Idealista.com, spokesperson Francisco Iñareta also expects market stabilization. “Regarding prices, although it seems unlikely that we will see widespread falls in major markets over the next few months, they will likely cool down and follow a stable path,” he adds. However, he points to a new cycle with fewer transactions and stagnation in the most active markets due to more expensive credit.

Homebuyers need to have savings of at least 30% of the property’s price, a challenging requirement given the high cost of mortgages and stricter bank conditions. 20% will cover the non-financed part by banks, and the remaining 10% is for taxes. This requirement excludes much of the youth and those with lower savings.

Renting is an alternative for those who cannot buy a home, but its cost is also unaffordable for many. It has seen significant increases in many provincial capitals, although nationwide it has evolved in line with the rise in purchase prices. On average, according to Idealista.com data for the end of the year, the increase has been 8.4%, with a price of 11.4 euros per square meter per month. Very tied to economic prosperity and population, the Mediterranean coast shows the highest rental increases.

Barcelona remains tense: rental prices rise by 25% and housing prices by 5%

In Barcelona, the rental increase has been 25.7%, followed by Alicante (23.4%), Valencia (20.9%), Málaga (20.7%), and Girona (19.2%). Orense also stands out, with one of the lowest prices (6.6 euros per square meter), seeing a rental increase of 15.9%. Madrid capital is above the average with an 11.2% increase, surpassed by Palma de Mallorca and Teruel among the capitals with the highest rental increases.

In San Sebastián, with the second highest price (16.3 euros per square meter) after Barcelona, the increase has been more modest at 5.20% compared to 2021. As Luis del Corral points out, renting offers greater flexibility compared to buying, allowing more mobility and avoiding the impact of rising Euribor rates. “Obviously, demand due to price or not finding what one needs will wait for better times or seek rental housing. This additional pressure will maintain rental prices and even increase them,” he explains.

An additional factor that may affect the market is the 2% cap on rental price increases during 2023, a measure taken by the government this week and partially implemented in the past year. Regarding this issue, the BBVA Real Estate Observatory points out that this measure “reduces housing profitability, which has been around 4% in recent years. It could lead to a reduction in rental supply, which, in a context of rising interest rates, may result in greater difficulty accessing housing, especially for young people, who rely most on renting.” Profitability, as mentioned by Bankinter, now faces competition from state bonds.

Cristina Arias notes that “although the rental increase has been capped at 2% to avoid fueling an inflationary spiral, this limit does not apply to new rental contracts.” She also warns of trends in both buying and renting in high-pressure areas such as Madrid, Barcelona, the islands, or the Mediterranean coast. “Areas with higher demand dynamics and greater space restrictions usually experience higher long-term revaluation of purchase and rental prices, so buying can be a good option as long as the asset is not overvalued at the time of purchase.”

Changes are expected in housing that could impact the market. On one hand, the EU’s NextGeneration funds have so far focused on rehabilitation. However, as indicated by BBVA, a 1 billion euro allocation is reserved for the construction of rental housing.

On the other hand, the Housing Law is still in parliamentary process. For Del Corral, it could be a key tool to benefit renting: “The fundamental role of the future Housing Law should be the review of protected housing modules, as with current promotion costs, most projects are economically unfeasible. If this is done, it will result in an important park of protected rental housing, which is what the sector needs,” he concludes.

Both buying and renting in Spain will continue to be major issues in 2023, especially for the youth. The new year will bring price containment, with no major fluctuations and a concerning lack of supply.