The real estate sector is cooling down

After a year in which demand for housing exceeded all expectations, in 2023 we predict that the number of sales will adjust significantly, mainly due to the impact of higher interest rates. House prices, which tend to respond rather slowly to any fall in demand, will slow markedly although we expect them to maintain a slightly positive growth rate in 2023 (albeit adjusting in real terms due to high inflation). The supply of housing, which is insufficient to meet structural demand due to the creation of new households, will remain very limited as a result of the economic slowdown, high construction costs and waning demand.

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January 25th, 2023
Signs of a cooling real estate market are becoming increasingly evident

Demand for housing was surprisingly dynamic in 2022. The upward trend that began in 2021 continued into the first half of 2022, boosted by several factors such as a change in preferences following the pandemic (working more from home, more spacious properties, etc.), «forced» savings during the lockdown that have partly been invested in real estate, very low interest rates and the rapid recovery in foreign demand.

Demand continued to grow strongly during the summer but the first signs of a cooldown (more modest growth rates) began to be perceived due to the exhaustion of the expansionary cycle, the first interest rate hikes and, above all, expectations that the ECB would continue to raise interest rates over the coming months. Indeed, some buyers brought forward their home purchases so they could take out a mortgage at a more favourable fixed rate before interest rates rose further. The combination of all these factors has pushed sales of housing up to very high figures (644,000 sales in the 12 months up to September 2022), figures not seen since the summer of 2008.

The first signs of demand cooling down have begun to be perceived, due to the exhaustion of the expansionary cycle and interest rate hikes.

Despite these excellent figures, over the coming months housing demand will wane due to the impact of higher interest rates.1 The 12-month Euribor (the main benchmark for variable rate mortgages) rose by about 330 bp in 2022 (from –0.45% in January to 2.83% in November)2 and, on average, implied market interest rates are expected to remain around 3% (or slightly below) in 2023. Since most buyers tend to require financing to purchase a home, this will directly impact on demand. We therefore forecast that the number of sales will decline by around 20% in 2023 to 480,000 homes, although this level would still be higher than the average since 2007 (450,000).

Foreign demand, on the other hand, may also be affected by the economic slowdown in the countries of those nationals who tend to buy most property in Spain (the United Kingdom, Germany and France). Nevertheless, the most recent data are extraordinarily positive: foreign nationals bought more than 90,000 homes in Spain in the four quarters up to Q3 2022, accounting for 14.1% of all sales and far exceeding the pre-pandemic values.3

  • 1. The ECB raised interest rates by 200 bp between July and October 2022 and we expect it to raise them by a further 100 bp up to Q1 2023, bringing the depo rate to 2.5% and the repo rate to 3%.
  • 2. This increase in the 12-month Euribor pushes up variable rate mortgages significantly. To address this situation, the Spanish government has reached an agreement with the banking sector to update and extend the Code of Good Practices and provide relief for the most vulnerable mortgagors and those at risk of becoming vulnerable.
  • 3. Data from the College of Registrars.

Sales of housing are starting to slow down

Last actualization: 12 January 2023 - 12:45
The supply of housing is still very limited

The number of new building permits (108,000 homes in the 12 months up to September 2022) is much lower than the net creation of households (207,000 per year up to Q3 2022), data that suggest housing supply is insufficient in relation to structural demand due to population growth. This lack of supply to meet structural demand due to demographics is an aspect discussed in the article «What big data reveal about the supply of new housing and demographic trends in Spain» in this Sector Report.

One factor limiting the post-pandemic recovery in supply has been the sharp increase in construction costs, as well as certain inputs being in short supply and growing labour shortages. Recently, the upward trend in costs appears to have slowed (14.7% year-on-year in September, down from a peak of 19.5% in May) and the decline in industrial metal prices on international markets points to construction costs moderating in 2023, although they will be higher than before the pandemic. For more details, see the article «How will construction costs in Spain evolve in 2023?» in this Report.

The economic slowdown, high construction costs and waning demand will restrict growth in the supply of in 2023.

The growth in house prices has started to moderate but we don’t expect any sharp adjustment

House prices started to moderate even before there were clearer signs of demand cooling down. The different price indexes for Spain’s residential market show year-on-year growth going from between 6.7%-9.5% in Q1 2022 (depending on the index) to 4.7%-7.6% in Q3 2022, as can be seen in the chart below. There are also signs of less dynamic price growth in some segments of the commercial real estate market (see the article «Given the current economic scenario, the commercial real estate market goes into ‘wait and see’ mode» in this Report). Despite this slowdown, it is worth noting that growth rates remain considerable and, up to Q3 2022, house prices were still supported by very strong demand.

The production of new homes was lower than net household creation in 2021 and 2022

Last actualization: 12 January 2023 - 12:46

However, the worsening economic outlook and other more structural factors (such as the lack of residential land in the zones most in demand and regulatory uncertainty) suggest that supply will remain stable in the short and medium term. As a result, we expect new building permits to decline moderately in 2022 as a whole (100,000 homes) and to remain at similar levels in 2023. Again, this figure is clearly lower than the National Statistics Institute’s projection of new households (217,000 per year on average between 2023 and 2027). In addition to new builds, the renovation of existing housing should gain momentum as projects linked to the European NGEU reconstruction funds are implemented. However, for the time being the number of permits granted to renovate housing up to September 2022 was 11.8% lower than the same period in 2021.4

  • 4. As of 31 October 2022, the already pledged expenditure of the renovation programme was less than 5% of the €1,389 million budget.

The renovation of housing does not seem to be growing despite the deployment of NGEU funds

Last actualization: 12 January 2023 - 12:48

House prices are beginning to moderate

Last actualization: 12 January 2023 - 12:49

If we look at the cumulative growth in house prices between Q4 2019 and Q3 2022 (latest available data), we can see that the highest growth rates were recorded in provinces popular with tourists, such as Cadiz (9.2%), Malaga (12.6%), the Balearic Islands (10.4%) and Alicante (7.4%).5 The exit from the pandemic and the strong recovery in international tourism have therefore helped the real estate markets in these tourist areas to grow more vigorously. On the other hand, there has been a generalised slowdown in house prices over the course of 2022 across all regions, including those that are popular with tourists, this being due to common factors affecting the housing market as a whole, such as rising interest rates.

We believe this slowdown in house prices will become more pronounced in the final part of the year and in the first few quarters of 2023, coinciding with the period when economic activity is likely to stagnate. After this difficult winter (due to the energy crisis and high inflation), heading into spring we expect GDP growth to pick up again, albeit modestly. Consequently, for 2023 as a whole we forecast 1% growth in Spain’s GDP (4.5% in 2022) and an average of 4.5% inflation (still high but much lower than the 9.1% recorded in 2022). We also expect jobs will continue to be created (0.5%, around 112,000 more employees as an annual average) although the unemployment rate may rise slightly due to a larger labour force. Within this scenario of pronounced economic slowdown but not recession, we expect house prices will maintain a modestly positive growth rate in nominal terms (around 1%), although the adjustment will be considerable in real terms due to high inflation (–7.1% cumulative in 2022-2023). We also still believe there is little risk of any sharp adjustment in the real estate market because the fundamentals are much stronger than in the previous expansionary cycle of Spain’s real estate market. Let’s look at this in more detail.

  • 5. Data from the Ministry of Transport, Mobility and Urban Agenda.

In the current expansionary cycle of Spain’s real estate sector (2014-2022), no imbalances have accumulated that could lead to a sharp correction in the sector.

The economic literature identifies two major factors in the formation of real estate bubbles in an expansionary phase, which also determine the severity of the correction in the subsequent stage (when the bubble «bursts»). The first of these factors is how sharply house prices rise in the expansionary phase, particularly if this growth is not supported by structural factors (demographics, household income, etc.). The second factor is the increase in credit to households to purchase a home, which is normally accompanied by a relaxation of requirements to be granted a loan on the part of financial institutions (a credit boom). When households are excessively in debt, they are more vulnerable to any loss of value in the property underlying such debt. In addition to these two factors, the severity of the adjustment also depends on whether a large stock of unsold new housing has accumulated (in which case the period required subsequently to «digest» this stock is longer, limiting the recovery in the construction sector).

The table below compares the trends in different variables related to these factors in the two most recent expansionary cycles of Spain’s real estate market (1999-2007 and 2014-2022). It is evident that these expansionary stages have little in common. In the first expansionary cycle, housing appreciated by 154% in 8 years (12.3% per year) while, in the second, prices grew by 19% in 8 years (2.2% per year). Similarly, there was considerable growth in credit to households to purchase a home in the first cycle (20% per year), with household debt as a percentage of GDP increasing by 39.7 pp and the number of mortgages reaching 1.24 million in 2007 (1.75 mortgages were signed for every sale). In terms of supply, 5.6 million building permits were approved in the period 1999-2007, which represents 1.6 dwellings for every new household created in the same period, exemplifying the construction boom taking place.

The panorama for the 2014-2022 period is quite different. During this expansionary cycle, households deleveraged extensively (debt fell by 19.5 pp of GDP), credit for construction and development declined, there was no excess supply (0.9 permits for each new home) or excessive growth in credit (although the number of new loans being granted is growing strongly, this is barely enough to maintain the outstanding balance of mortgage credit), and the requirements to be granted a loan were not relaxed (8.9% of mortgages with LTV >80%). Moreover, the high percentage of fixed rate mortgages granted in recent years limits the impact of rising interest rates on newly mortgaged households (which tend to have a higher LTV).

The affordability ratio (house price over median household income) warrants particular attention as this has increased steadily since 2014 (rising to 8.2 in 1.5 years). The Bank of Spain has also noted a larger concentration of high loan-to-disposable-income ratios among lower income households, which may be more vulnerable to any macroeconomic risks that materialise.


Although we don’t expect any significant price corrections for Spain as a whole, there may be some adjustment in those markets where prices have grown more strongly in recent quarters and whose prices are more overvalued in relation to the fundamentals. On the other hand, prices will hold up better in the most sought-after locations, such as the centre of large cities and tourist destinations. We also predict different trends for different types of housing: second-hand housing will be the most affected while new builds will probably perform better due to their relative scarcity and high demand.

In the short and medium term, the slowdown in house prices could intensify if certain downside risks materialise.

However, a somewhat more generalised price correction could occur should some downside risks materialise6. But even in this alternative scenario, the absence of significant imbalances suggests that no financial mechanisms with a negative effect would be activated and the potential impact on bank balance sheets would be contained, both because of the low level of overvaluation in the market7 and also prudent mortgage lending conditions. Nevertheless, supervisory authorities have recently warned that risks to financial stability have increased, although macroprudential measures are not deemed necessary at this stage.8

  • 6. One relevant risk is that the ECB may be forced to tighten financial conditions more than we have assumed in our main scenario.
  • 7. According to the Bank of Spain’s Financial Stability Report for Autumn 2022, the indicators for price imbalances in this market show signs of contained overvaluation.
  • 8. Bank of Spain Financial Stability Report, Autumn 2022.
The rental market: how long will the upward trend last?

Based on internal CaixaBank data regarding rent payments (duly anonymised and processed in aggregate using big data techniques), we have constructed indicators for the annual trend in rent prices at a national level and for the different autonomous regions. We have also calculated indicators for «new rents» by selecting payer-issuer relationships that are six months old or less, with the aim of capturing any changes in trend occurring in the market. The charts below show that rents rose very sharply before the pandemic (2018-2019) but slowed markedly in 2020, while in 2021 and 2022 the average growth in rent prices was contained (less than 2%).9 However, very significant differences can be observed between high and low value rents: new high rents (75th percentile) grew by more than 4% on average, twice as much as lower rents. There are also considerable differences across the autonomous region, with the Community of Madrid posting the largest growth in 2022, above 6% on average.

  • 9. In March 2022, the government imposed a 2% cap on rent increases upon lease renewal.

Within a context of high inflation, which is eroding the purchasing power of households, it seems there is little room for rents to rise further.

Índice CaixaBank del precio del alquiler en España

Total rentals

Last actualization: 12 January 2023 - 12:50

New rentals

Last actualization: 12 January 2023 - 12:51

Looking ahead to 2023, the trend in rental prices is uncertain as there are factors pushing in both directions. On the one hand, there has been a considerable cumulative rise in rental prices in recent years (except for a pause during the pandemic), larger than the growth in household income, making it significantly harder for many families to pay their rent. Within a context of high inflation, which is eroding the purchasing power of households, it therefore seems there is little room for rents to rise further. In addition, it is very likely that the 2% cap on rent increases will be continued in 2023. However, the pressure from demand may be even greater than in recent years, as rising interest rates make it more difficult to buy a home, pushing a larger proportion of the population into the rental market. Although the supply of rental housing is expected to increase in the medium term, supported by investor interest in this segment (co-living, build to rent, etc.), it is unlikely to be enough to meet the growing demand.