Doom or boom?: What awaits the Spanish real estate market in 2023?

MOST buyers and sellers I talk to these days keep mentioning the possibility of a recession ahead. How could they not?

Just watch the news and there are daily reminders about economic headwinds, including in real estate.

I’m sure you’re familiar with the exercise: inflation and rising interest rates, a looming recession, war in the Ukraine, and tensions with China.

However, at the same time, there remains a lot of optimism in the Spanish property market and in the economy in general that the current problems are short term and temporary.

Which version of reality is true and what does it mean for the real estate market on the Costa del Sol? Should we be optimists or pessimists?

Let’s start with the bad news. Inflation has risen due to a number of factors. Some stemming from Covid and the damage to supply chains after restrictions were lifted. Others from inflationary spending during attempts to keep economies from collapsing and people from going bankrupt.

Of course, there is also the effect of the war on fuel costs and to try to rebalance the economy, central banks internationally have raised interest rates repeatedly this year.

Whether it works or not, interest rate hikes have a significant impact on the property market, particularly as they depress demand by increasing the cost of borrowing.

There’s more bad news when you start looking at the customer base on the Costa del Sol, for example Sweden, which accounted for 14% of shoppers from Malaga province.

THE CASE OF SWEDEN

In Sweden, 10-year mortgage rates are now between 4.44% and 4.9%.

In a loan of €200,000 that means €1,111/month in debt payment.

A big jump in a year in which you could have the same mortgage at 1.5%, giving payments below €800/month.

And Swedish interest rates are still rising and rates are expected to hit 3.5% to 4% as a minimum.

With the premium banks charge over the prime rate, there could be 6% mortgage rates before the increases end.

As a result, Swedish home prices and sales are plummeting in response. Home prices have fallen more than 11% since March. The Riksbank predicts that price declines will continue to as much as 19.9% ​​by the end of 2023 from their peak.

The reason is clear: the Swedes are deeply in debt with a ratio of just over 200% debt to net income. In fact, all Scandinavian countries have a very high debt to net income ratio.

The only other country in the same league is the Netherlands, with a debt to income ratio of 222%.

There have also been unsustainable price increases, with Sweden experiencing a ludicrous 32% since 2019, while the Netherlands is up 40%.

It is because of this imbalance between debt and income, and the unsustainable growth of prices, The Economist recently sounded the alarm. “Housing crashes and recessions that are preceded by this type of debt buildup tend to be more severe. Now that central banks are raising rates at the fastest pace in more than four decades, countries drowning in mortgage debt will once again be exposed to unpleasant consequences.

A LITTLE SPANISH SUN

But don’t panic. Now the good news.

Here in Spain the real estate market, which suffered one of the worst crises in the western world in 2008-2014, is much better.

The experience of that crisis had an impact on the behavior of sellers and buyers, as well as the market in general, making it one of the most resilient in Europe.

Household debt is now less than half of what it is in Sweden and the Netherlands. In fact, it fell 50% between 2010-2020, to just over 100% of net disposable income.

Also, when the market recovered in 2015 from a crisis in which prices fell a catastrophic 37%, Spaniards began to switch to fixed-rate mortgages. That ensured that they would be protected from exactly the kind of interest rate changes that we are seeing today. .

About 72% of mortgages are now fixed, compared to almost 100% of variable-rate mortgages just before the crash.

In contrast, in Finland, 96% of new housing loans have variable interest rates, while in Sweden it is 48% of new loans.

Furthermore, Spanish prices have never fully recovered from the last crisis and are mostly still significantly below the 2007 peak.

Even with the post-Covid rebound, prices were only up 5.5%. In other words, house prices in Sweden increased by almost six times.

There is a consensus that price increases in Spain will moderate in the next two years as the economic problems are resolved. And there is also a consensus that Spain will do better than most.

However, what is not certain is what exactly that means.

Bankinter believes that prices will fall 3% next year and then 2% in 2024. ING, for its part, believes that prices will grow 1% in 2023 after rising 7% in 2022.

That still means a real reduction in prices, as ING expects inflation in 2023 to slow to 4.4%; that is, a 3.4% drop in real prices.

That is, in any case, better than the average 9% drop in prices that the European Central Bank expects to take place across the euro zone.

In the UK, market analysts expect house prices to fall by 5-10% in the next year alone.

Therefore, Spain’s real estate market is in a better structural position than most of Europe.

There are other elements to consider as well. For example, Spanish interest rates are likely to remain substantially lower than in other jurisdictions, likely as low as 3.6% for fixed rates and 4.1% for variable rates before stabilizing (according to ING).

This compares to Swedish fixed mortgage rates being over 5% and UK rates also staying at 5-6% for the next two years.

That makes Spanish money cheaper for people in those two countries and Spain’s cheaper homes and mortgages could be an alternative to more volatile markets at home. Hopefully.

It’s also good that the Board made the region a more attractive destination by eliminating the wealth tax, which penalized foreigners owning property abroad.

In conclusion, I think there are many reasons to remain bullish. I expect real estate on the Costa del Sol, especially at the top end, to feel little effect compared to Northern Europe. And while, yes, price increases will moderate, it’s unlikely that we’ll see any significant decline. Stability and sun are my key points for this year!