The two markets are evolving with some disparity across different districts, but the citywide average remains stable or rising, making homeownership challenging for many citizens

Author: Lorena Martín

Source: Epe.es

Interest rate hikes are occurring every few months by mandate of central banks, and the term recession is becoming increasingly prevalent. In this context of uncertainty, many are wondering what will happen to the housing market. One of the main consequences seen so far is the increase in the Euribor. In October 2022, the index referenced by most mortgages rose by 653% compared to the same month in 2021, reaching its highest level since 2011, at 2.63%. In these circumstances, housing demand, sales, and property prices are not unaffected. So, when is it estimated that housing prices in Spain will drop?

In the past five years, the trend has been a stable increase in property prices, supported by low interest rates and also low mortgage rates. However, this scenario has now shifted. The European Central Bank (ECB) estimates that housing prices could fall by 9% over two years, while investment could drop by 15% across Europe. “With the increase in rates, it will be much harder to finance the purchase of a home because banks are setting more complex conditions,” says Sergio Nasarre, professor at Universitat Rovira i Virgili.

In the first quarter of 2022, housing prices were increasing at a rate of 9.8% across the Eurozone. In Spain, prices were rising below the average, at 8.5%, trailing behind countries like Germany, Ireland, and Estonia. “There will be a decline in demand and transactions because part of the population will not be able to access mortgages, especially the more unstable profiles. This will lead to a price reduction mechanism to close transactions,” explains Olivia Feldman, an expert at HelpMyCash.

Four Differences

Disparities between the housing markets of some European countries and Spain are noticeable. “The cost of buying a home in Europe has increased by 45% since 2010, while in Spain, the increase has been much smaller. Since 2016, after the crisis, it has risen by 15%,” explains María Matos, director of studies and spokesperson for Fotocasa. Another factor that could mitigate the situation in Spain is the increased investment in larger homes further from city centers to adjust to changing preferences after the coronavirus pandemic. Similarly, the confidence in the sector as a safe asset may revalue properties.

“Spaniards prefer to hold onto their property rather than sell it at a lower price. This leads to a decrease in sales because fewer sellers are willing to lower their prices,” adds Feldman.

The impact of the rate hikes in Spain will thus result in a “controlled deceleration” of property prices in 2022 and 2023, according to the Predictive Study of the Residential Market Performance in Spain, prepared by Atlas Real Estate Analytics. This report specifies that prices will drop by 0.9% in Spain in 2023, reaching an average of 1,691 euros per square meter. It also indicates that the expected trend for the rest of the year will be downward, with a projected average price of 1,706 euros per square meter, 2.9% higher than the figure recorded in 2021, but moderating its growth.

Transactions will also experience a change in trend next year. It is expected that 2022 will close with a 2.3% increase compared to 2021 (up to 665,754), but 2023 is projected to end with a 15.4% decrease compared to 2022 (563,450 in total).

Fewer Properties on the Market

Another factor acting as a brake on an aggressive price drop is the reduction in available stock. The availability of homes for purchase has been declining for a year and is expected to continue decreasing in the coming year. The market reached a peak of offer in October 2020, with around 700,000 properties listed. Since then, strong sales have led to a downward trend in available stock. Between October 2020 and the same month in 2021, the offer fell by 2.3%, and since then, the decline has accelerated. From the peak in 2020 to July 2022, there was a 7.9% drop, reaching 640,724 listings. Construction costs have also played a key role in this reduction, as many developers halted their activities due to rising costs.

Real estate agencies have already noticed changes in trends. Sources consulted acknowledge that they are at a turning point and are observing a certain slowdown with reduced sales. Additionally, it is expected that by 2023, the gap between the listed price and the final sale price will narrow, which currently “hovers around 20%,” according to Paula Eseiza, an expert at HelpMyCash.

Therefore, those intending to sell are advised to set a reasonable price from the start to avoid prolonged transactions. “It is estimated that 24% of the population has halted buying and selling due to the rate hikes. When prices and rates start to drop, these individuals will return as market demand. This could lead to a rise in prices again, although it will depend on the response of the real estate market,” Matos adds about future expectations.

What is clear is that the financial situation of families will be more complicated due to the rising daily costs. According to InfoJobs and Fotocasa, in the past five years, salaries have grown by 6% while housing prices have increased by 16%, a discrepancy that will be difficult to cover with the expected slowdown.