The upward trend in house prices will tend to moderate

The most recent real estate market data show that the upward trend in demand and house prices has been accentuated in the early stages of 2022, in line with the positive inertia that the Spanish economy has maintained despite the adverse context. However, in the medium term the outlook is that the real estate market will tend to slow down.

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  • In the first half of 2022, the Spanish economy remained on a positive course despite the adverse environment, largely thanks to the boost provided by tourism. This favourable trend will continue over the summer months as we anticipate a tourist season that could already be very similar to the one before the pandemic. Another positive note are the latest real estate market data, indicating that the upward trend in housing demand and prices became stronger in the early stages of 2022: more than 600,000 homes have been sold in the past 12 months, a figure not equalled since 2008, while house prices accelerated from 6.4% year-on-year growth in Q4 2021 to 8.5% in Q1 2022, according to data from Spain’s National Statistics Institute.
  • We believe this growth in prices may continue in the short term, especially due to rising construction costs, exacerbated by the war in Ukraine and bottlenecks in global value chains. But the outlook is for a slowdown in the real estate market over the medium term. The spike in inflation is proving to be bigger and more persistent than predicted, leading to an earlier and faster tightening of monetary policy than expected. The ECB ended its net purchases of financial assets on the 1st of July and will soon embark on a new cycle of interest rate hikes. Financial markets put benchmark rates in the 0.75%-1.25% range by the end of this year, with hikes at all ECB meetings.
  • Given this context of tighter financial conditions and the decline of the temporary factors that had been driving demand, a certain cooling of the real estate market is likely with a view to 2023. Specifically, we expect the number of sales to fall from the 550,000 forecast in 2022 to 490,000 in 2023, and house prices to slow from the 6.6% growth forecast in 2022 to 2.2% in 2023. Such price moderation will limit the deterioration in affordability caused by higher interest rates. The absence of imbalances in Spain’s housing market will also reduce the possibility of a hard landing.
  • However, the situation is quite different in other advanced economies whose house prices have risen steadily since before the pandemic, resulting in a certain risk of real estate bubbles forming. This Sector Report reviews the situation of the real estate markets in these countries, as well as the macroprudential measures implemented in each of them to address the situation.
  • It also examines the house purchases made by foreigners in Spain, a demand that was severely affected by the pandemic but which has since recovered surprisingly quickly. In fact, the strength of foreign demand is a factor that is contributing to the unequal growth observed in house prices across different regions, as prices are rising more sharply in those provinces with a relatively higher proportion of purchases by foreigners. Nevertheless, CaixaBank Research’s municipal house price forecast models, based on big data and machine learning techniques, point to a certain slowdown in house prices over the coming quarters, with this reduction being somewhat more marked in tourist areas.
  • The last article looks at the other Mediterranean countries in which the main nationalities that buy homes in Spain also tend to acquire a residence, noting that the British and Swedes have a particular fondness for Spain whereas Croatia and Turkey also benefit from a relatively large number of German nationals. We also analyse the long-term prospects and conclude that, if we take into account the demographic trends in Europe and the high competitiveness of Spain’s tourism industry, the future for foreign housing demand in Spain looks promising.
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