Spain's real estate sector after the shock of COVID-19
The COVID-19 pandemic is severely impacting economic activity and the real estate sector is also feeling the effects, albeit not as much as other sectors. Specifically, at CaixaBank Research we expect GDP to fall by between 13% and 15% in 2020 and not to return to pre-crisis levels until the end of 2023. However, despite the seriousness of the situation and the high uncertainty regarding how the pandemic will develop, it is important to note that the sector is supported by a much stronger foundation than in the previous crisis of 2008.
Before the outbreak of the coronavirus, the financial situation of Spanish households and companies in the sector was generally healthier than it was 12 years ago. Moreover, the number of new properties being built was not excessive in relation to the demographic trend. Banks also have much better solvency and liquidity ratios. All these factors make us more confident in the sector's ability to weather the current crisis.
Nevertheless, the scope of the economic impact of COVID-19 will significantly affect the labour market and, consequently, the demand for housing. House sales fell by 39.2% year-on-year in April and we expect a drop of between 30% and 40% for 2020 (with a gradual recovery in 2021). Household income is being eroded and uncertainty about future employment prospects may lead to an increase in precautionary saving by households and the postponement of long-term investment decisions. House sales to foreigners, who accounted for 12.5% of the total in 2019, will be particularly affected.
Construction activity was directly hit during the state of emergency but resumed relatively quickly as restrictions were lifted. All the same, a significant slowdown in the initiation of new building projects is highly likely due to the uncertain climate. New building permits could decline by 20% to 40% by 2020.
Given the drop in demand, house prices will undergo a significant adjustment and, by the end of 2021, could be 6% to 9% below their pre-crisis levels in Spain as a whole. Nevertheless, there will be considerable differences, both geographical and in the type of housing, with all the evidence pointing to tourist areas and second-hand properties suffering the biggest decline.
The rental market is likely to be less affected as it is supported by higher demand given the difficulties faced by households to buy a home. In fact, we have devoted the article «To buy or to rent? A question of income but particularly of savings capacity» in this Sector Report to an analysis of housing affordability for renters.
Finally, we should also note that the current crisis is triggering changes in many different aspects of our lives, a large number of them related to our residential preferences (never have we spent so much time in our homes!). The pandemic could also accelerate some changes in areas such as the modernisation of homes, which would support the transition to a more sustainable economy.
Once the peak of the epidemic is over, we must focus all our efforts on recovery. The resulting economic and social changes may be far-reaching and will entail a transformation of the real estate market. Given this situation, we must be able to turn the challenges into opportunities. Only then will we #ComeOutStronger.