Author: Pablo Allendesalazar

Source: El Periódico

The rapid and unprecedented rise in interest rates, with which central banks are attempting to curb the inflation spiral, is disrupting a significant number of home purchases, causing financial losses for frustrated buyers. Juan Fernández-Aceytuno, CEO of Sociedad de Tasación, warned on Wednesday: “Many purchases in deposits (used properties) and off-plan purchases (new properties) are falling through as people can no longer afford the property due to the increase in interest rates.”

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The European Central Bank (ECB) has raised the official interest rate by 2.5 points since last July, to 2.5%, at the fastest pace since its creation in 1999. Anticipating this, the Euribor (the rate at which banks lend to each other) has surged from -0.502% in December 2021 to 3.018% last month, which in turn has pushed up mortgage rates. The average rate for new home loans has doubled, from 1.38% at the end of 2021 to 2.7% last November, a significant increase that is causing many families to abandon operations that were already committed and secured.

“Normally, a new home is bought off-plan or under construction, and it takes an average of 18 months to two years from the moment the house is purchased to when it is finalized with the deed, notary, and financed with a mortgage. During those two years, a lot can change. Someone who bought a house two years ago might not be able to afford or finance it now because they had calculated paying with a fixed-rate mortgage at 0.8%. If that rate is now 4%, the situation is very different,” Fernández-Aceytuno explained.

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Change in Cycle

Looking ahead to this year, the increase in the cost of money will lead to “much more negotiation” in used home transactions, according to the executive in a press meeting: “People are less focused on the total price of the property and more on the house they can afford based on the financing they can obtain.” In new properties, however, this effect will be less noticeable as the supply is “very limited,” giving buyers less negotiating power compared to the second-hand market, where there is “more supply than demand.”

Experts predict that the Euribor will rise to between 3.5% and 4% in 2023.

Fernández-Aceytuno stated that the “real estate cycle is exhausted,” following the usual eight years plus the “COVID extension.” He noted that the number of transactions and mortgages is clearly falling: “We see it in the appraisals we conduct daily; there has been a significant drop in housing demand since November.”

Contributing to this is that banks “are tightening financing conditions because that is what happens in times of a cycle change.” Thus, he enumerated, risk policies are becoming more restrictive, appraisals are scrutinized closely, down payments for mortgages have doubled due to interest rate hikes, household disposable income has fallen due to inflation, and institutions will have less liquidity as the ECB withdraws 2.1 trillion euros from the market in the coming months, in addition to the nearly 400 billion already drained.

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More Renting

In Fernández-Aceytuno’s view, all this will lead to an adjustment in the price of used properties, with the intensity depending on how long high interest rates last and the evolution of employment. In contrast, new properties, which make up only 12% of the market, will either maintain or increase in price due to the scarcity of supply. Last year, according to statistics from his firm, second-hand homes increased in price by an average of 3.2%, while new homes rose by 7.1%.

Another consequence of the increase in rates and the inability of many households to buy a property is that renting “could become the focus of 2023.” In this regard, Fernández-Aceytuno dismissed the idea that the legal limit on rent increases to 2% would cause landlords to withdraw properties from the market. However, he pointed out other effects.

“For a rent of 1,500 euros, that’s 30 euros; I don’t think anyone will stop renting out because they can’t raise it by 60 or 90 euros. But we will see a shift to vacation homes, agreements between parties with higher increases, and landlords listing their properties at higher prices because they expect not to be able to raise them in the next 15 years,” he noted.