The Cracks in The Spanish Property Market

Spanish Real Estate Market Was Predicted to Sunk Up To 40%, The Reality Is Much Different (yet).

Those who know me well are aware of my interest for real estate. More specifically, I am passionate about contemporary design.

As much as possible, I like to follow the global trends in real estate, and more often the market in Spain where I look forward to investing as conditions become more favourable.

Recently, I conducted research on this topic and now I am presenting you my findings in this article, I hope you enjoy it.

Spanish Property Market As Is (2021)

Contrary to what many expected (me inclusive), the Covid pandemic did not hurt the real estate market in Spain, not significantly.

Instead of seen a decrease in real estate prices both on units for rent and for sale, we have seen a small increase year over year (YoY) otherwise.

Although many disagree on the causes propelling this small rise overall in the prices of rentals, few point to the ‘generation-rent’ as the main driver.

Generation-rent (for those who do not know) refers those young adults (18–40) who have been priced out of the housing market–unable to buy and having to pay a high percentage of their monthly income on rent.

As of the time of writing this article, demand for rentals remain solid, more specifically in the big cities and their suburbs.

Prices Change YoY

According to Idealista (published in Virtoproperty), during Q1 (2021) the average cost of real estate was €1779/m2 — combining both new and used homes, which stands at 0.9% above the year earlier’s figures (see image below).

According to the figures above, the touristic regions of the South and Eastern costs were the ones with smallest growth, which could be explained due to the traveling restrictions.

The regions with a noticeable growth were those in the countryside, as some spaniards decided to benefit from remote working, away from crowds.

Current Prices

McKinsey — for example, predicted back in 2020 a revenue slowdown of approximately 20% in the sectors such as accommodation and food services HORECA (Hotels-Restaurants-Cafés), entertainment, transport, auto, real estate and wholesale and retail (excluding groceries).

In this line, CaixaBank concluded in an article dated July 14, 2020 that the prices of the real estate fell as much as 39.2% in early 2020 (YoY), and continued to foresee a similar percentage drop between 2020–21.

And yet, although some experts forecasted a strong overall retracement, the real estate prices still holding strong both in terms of rentals and sales (November, 2021).

Further more, the small increase in prices could likewise be attributed to the shortage of new constructions available.

Market uncertainty, fuelled by the pandemic and the restrictions that came with it, have had an impact in the attitude toward embracing risk on the side of real estate promoters.

As a result of whatever the real reasons might be, the construction of new dwellings has seen a decrease of 32% (2019–20).

The increase in construction costs have likewise impacted the prices of new buildings, which stand at an average €2472 per square meter.

The following table contains the average real estate prices of popular provinces in Spain among foreigners, and their share purchase impact.

The real estate prices in the capitals of the autonomous communities have either remain stable or shrunken. Some argue this is due to more Spaniards choosing to relocate to the countryside.

My personal analysis however, is that the demand and supply has somehow even out due to the reduction of new assets reaching the market.

Further on my point, Banks likewise have tighten access to mortgages due to renewed risk policies, which has a direct impact on the number of qualified buyers, not to mention unemployment rates in the mix.

Some examples of prices in the coastline are displayed in the following table for reference.

Price Forecast

Analysts at S&P have predicted a cooldown in the real estate prices in western countries between 3% and 3,5% across 2021.

In Spain however, the reduction in real estate prices might be more severe due to socioeconomic factors. In this line, the credit rating agency Fitch forecasted a reduction between 4% and 6%.

Experts at CaixaBank in Spain are more pessimist, their study states that during 2021 alone the real estate prices will fall between 6% and 9%, returning to pre-crisis levels not earlier than 2024.

In the same study, CaixaBank reminds that GDP will hit an all-time low between 13% and 15% during 2020, taking it up to the end of 2023–24 to pick back up again.

All in all, we’re living uncertain times and pretty much all about the near future is a guess game.

As an investor myself, I’d like to see prices adjusting nicely, I trust economic conditions will get harder before they can get any better.

The moratory on loans and mortgages in Spain has very much masked the real decay in the economic tissue.

The moratory (deferment) on the payment of loans and mortgages ended in March 31st (2021). The real number of defaults ever since is unclear.

The volume of credit tight to those deferrals reached up to 56.745 bn, according to the Bank of Spain.

I’d expect to see the tip of the iceberg as early as the first quarter in 2022, from there we will have a more clear perspective of the real economic damage and its impact in the real estate market.

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You can read more about delinquency rates in Spain, and deferred payments in my article SMEs Delinquency Rate Hits 70% in Spain.

In this article I discuss the liquidity deficiency among SMEs in Spain, which seems to be at the core of the 70% in deferred payments according to a recent report by the Observatory of Delinquency of the Spanish Confederation of Small and Medium Enterprises (CEPYME).