First and foremost, the Russian war and inflation are having an impact on investors and consumers. Consumers across Europe are seeing a decline in the general economic situation and expectations, not just in Spain. The confidence index is falling, and interest rates will continue to increase, so how does this affect the Spanish Property market?

Euribor will continue to rise.

According to more than one analyst, the trajectory of interest rates has taken a concerning turn. The Euribor rate continued to increase and nearly reached 2% at the start of the year, and this growth in 2021 is predicted to reach 2.5% by the end of the year. Fixed rates have followed the same path, limiting the market supply of fixed mortgages.

The domino effect

Furthermore, economic uncertainty is apparent after the market reverted to equilibrium following the epidemic recovery. The pandemic disrupted supply systems, resulting in the first inflationary concerns. These intensified due to the commencement of Russia’s invasion of Ukraine.

The cost of energy, in particular, increased, and raw materials became scarce. As a result, inflation increased, causing interest rates to rise, price hikes, and the cost of new-build homes to rise due to higher building costs because of costlier materials and labour.

Longer sales times and higher mortgage interest rates

Higher mortgage rates and extended sales periods will characterise the coming months. Banks will require more before offering a loan. As a result, the upward trend in the number of Spanish property purchases and sales transactions reported thus far in 2022 has paused.

Price hikes are unavoidable.

It is expected that price rises will continue in the following months, but the sector is already a shelter from inflation. Demand is still high today and shows no indications of slowing down. On a positive note, foreign investment is returning, and the gains will be around 6%.

Demand will stay relatively stable.

House prices will rise due to inflation and the uncertainty it causes. However, buyer demand is projected to stay more or less consistent as residential homes remain an appealing long-term investment alternative, particularly in unpredictable financial markets.

Moderate price increase

The price increase, however, will be limited due to a substantial commodity shortfall. This will be especially true in large cities such as Madrid, Barcelona, and others. However, coastal areas such as Málaga and the islands are also affected. The rental market is expected to follow suit.

There will be exceptions, such as in some markets where demand remains robust. This includes luxury residences in major cities and new construction, which is still in great demand due to scarcity.

Fewer home purchases?

According to experts, the combination of all the variables mentioned earlier does not appear to favour the real estate sector. This will likely impact prices and transaction volume, where a noticeable slowdown is apparent. Nonetheless, experts do not expect significant declines in transaction volume or pricing.

According to the National Institute of Statistics (INE), Spanish property sales in the first half of 2022 were the most since 2007. There were 330,997 transactions during this period, which is 23.1% more than in 2021.

The market has had the highest confidence since 2014

The real estate market is now experiencing its most robust levels of trust since 2014, according to research like the PwC “Emerging Trends in Real Estate” survey. This is despite increased raw material costs.

Even with the difficulties and challenges of inflation and the ensuing uncertainty, most experts view the real estate sector as a strengthened industry. While still adapting to new challenges and trends, real estate offers a straightforward buying and selling experience and supports buyers throughout the process.

They anticipate a stabilisation of the real estate market and a rise in prices by the year’s end.

Bankinter’s 2023 property market forecast

The trend of rising home prices in Spain has marginally slowed this year, according to Bankinter’s most recent real estate market projection for 2023. 2022’s anticipated growth of 2% was lower at 1%, which is far less than the inflation rate.

Additionally, estimates for the whole of 2023 indicate that the price of homes will only increase by 1%. This suggests that home prices will begin to decline after massive spikes in the past two years.

The length of the rate hike cycle ultimately significantly impacts the housing market’s direction. The good news is that from a purchasing price perspective, decreased prices make homes more accessible to first-time purchasers. However, because interest rates are rising, it might be harder for people to be able to pay a mortgage.

When home sales decline, inventories grow, and new home construction stops. As a result, fewer jobs will be available and less demand for building supplies like wood and concrete. There are knock-on consequences in several areas like banking, retail, transportation, and manufacturing.

Trends in property prices if the bubble bursts

In the end, the length of the rate hike cycle significantly impacts the direction of the housing market. On the plus side, Spanish properties are more affordable for first-time buyers from a purchase price perspective due to decreasing pricing. However, the ability to pay the mortgage can become challenging if interest rates rise.

Buyers can stand on the sidelines.

However, despite decreasing pricing, homes cannot be sold since there are less interested purchasers. Homeowners who are not obligated to sell may decide to remove their properties from the market.

Fewer properties are available for sale as a result. In the end, property values can drop if opportunistic sellers are compelled to sell their properties due to rising mortgage rates or other economic factors. The likelihood of this occurring increases with the length of the recession or rate hike cycle.

Dustin Mullins