The Spanish real estate market experienced a significant decline in sales during the month of April, with a decrease of 21%.
Recently, the Spanish real estate market has experienced a noticeable slowdown due to various factors that have led to a decrease in property demand. Factors such as increasing interest rates, stricter credit conditions, and global economic uncertainties, including geopolitical instability, have all had a negative impact on housing demand. In April, there was a decline in mortgage demand, which fell below the average of the past five years for the first time. Additionally, the number of property transactions has shown a clear downward trend during the initial months of this year. Preliminary data from notaries, which tends to be ahead of official statistics, indicate that this downward trend is likely to continue in the upcoming months. The General Council of Notaries reports that home sales in April decreased by 21% compared to the same period last year, while the number of mortgage loans for home purchases declined by 32% year-on-year.
The impact of the economic downturn in Spain has been relatively milder compared to other nations, with a less significant decrease in mortgage demand. This can be attributed in part to the heightened interest from international buyers after the easing of Covid restrictions in 2020 and 2021. Additionally, the persistent issue of limited property availability has contributed to a slowdown in the decline of demand. Furthermore, the Spanish economy has outperformed the average in the eurozone, benefiting from a revival in tourism, which has also exerted a positive influence on the housing market.
Recent data shows that the growth in house prices has ceased.
Due to declining demand in the Spanish property market, there has been a marked slowdown in price growth. With a reduced number of potential buyers, sellers face fiercer competition, resulting in reduced pricing power. While house price growth peaked at 8.5% year-on-year in the first quarter of 2022, according to Eurostat, it fell to 3.5% in the first quarter of this year. Other price trackers such as TINSA also show a clear downward movement.
The impact of increasing interest rates on housing affordability
In the previous year, the considerable rise in interest rates has exerted substantial pressure on the purchasing power of potential homebuyers. This has created difficulties for prospective buyers who wish to acquire a home or qualify for a mortgage loan at the current price levels. The National Bank of Spain‘s calculations reveal a significant decline in affordability over the past year. Regular assessments conducted by the bank examine the proportion of income that an average household would need to allocate towards repayments for an 80% loan on a house. These calculations demonstrate a noteworthy deterioration in the affordability of properties. At the start of 2022, households only needed to allocate 30% of their income towards loan repayments, but by the fourth quarter of the same year, this figure had increased to over 36%.
Despite the improvement in wages, there was an additional increase in interest rates during the first half of 2023, potentially exacerbating the issue of housing affordability. It is expected that affordability will remain highly challenging in the second half of the year as interest rates continue to rise. If you are in Spain and need a English-speaking lawyer then you can do a Google search along the lines of English speaking lawyers near me.
The current trends suggest that interest rates have not yet reached their highest point
In the near future, there will likely be more upward movements in interest rates, which could further impact affordability. The 12-month Euribor benchmark interest rate, which influences mortgage rates, is expected to continue rising, even though it is believed to be nearing its highest point. The European Central Bank (ECB) has already suggested a 25 basis point rate increase at its upcoming July meeting. Recent statements from certain ECB members indicate that additional rate hikes may occur following the summer. This will exert more upward pressure on the Euribor. Additionally, mortgage rates have yet to catch up after the swift ascent of the Euribor.
According to prevailing patterns, mortgage rates are anticipated to increase in the upcoming months. It is projected that the average variable rate for mortgages, with a fixed-rate duration of up to five years, could reach a maximum of 5% by the latter half of this year. This estimate denotes a substantial surge from the 3.9% rate noted in April 2023.