How the Crises of the Twenty-First Century are Beneficial for Real Estate Investors in Spain

The market of real estate in Spain, like those of any other country, has experienced many ups and downs. Although the twenty-first century began relatively recently, the local economy has already faced 2 serious events, the 2008 bubble and the COVID-19 pandemic, the consequences of which are being fought worldwide. Let's review how these crises have affected the Spanish real estate market and whether they have benefited investors.

Content:

• Why did the bubble burst in the Spanish real estate market in 2008?
• Results of the 2008 crisis
• The impact of the COVID-19 pandemic on the Spanish real estate market
• Is it worth investing in Spanish real estate in 2022?

Why did the bubble burst in the Spanish real estate market in 2008?

In 2008, a financial crisis hit the global economy. However, not all countries were affected equally. In Spain’s case, it resulted in the unemployment rate rising to almost 23% by 2013, which led to huge social problems, such as the eviction of families unable to pay their mortgages.

Many European countries have followed the same path. Spanish real estate law is unusual in that eviction does not cancel debts, so families have to repay loans even if their house is repossessed by the bank. The worst period was in 2010 when 93,636 families were evicted from their homes. This social problem has affected the middle and lower strata of society.

To understand why this occurred, why banks gave mortgages to insolvent individuals, and why the government did not notice anything, you need to take a closer look at how the real estate bubble appeared in Spain. Most economists agree that it was formed in 1998 and burst in 2007. It was caused by factors such as low-interest rates, lower taxes for all mortgage households, and the belief that prices would rise due to the growing influx of migrants and higher wages.

But what made banks lend to all kinds of households? The answer to this question lies in understanding the mortgage structure in Spain. The loan/collateral ratio is calculated with the loan-to-value ratio (LTV). It is important to note that the value of a property is calculated by appraisal companies.

The Bank of Spain has calculated that an LTV equal to or below 80% is a good indicator, as 20% of the house value has been paid. However, the closer the LTV is to 100%, the riskier the mortgage is and the higher the probability that the debt will not be repaid. If the LTV of a potential lender exceeded 80%, the Bank of Spain, as a rule, refused the mortgage.

Despite this, some banks issued mortgage loans that did not comply with the policy of the Bank of Spain. Employees of a financial institution who were visited by families whose LTV exceeded 80%, then called the appraisal company and requested that they change the price of the house to achieve a lower LTV.

Two professors of the Pompeu Fabra University, Jose Maria Raya and Jose Garcia Montalvo came to this conclusion by calculating the LTV of those years using market prices instead of the estimated value. They noticed that many real LTVs exceeded 100%. This suggests that banks were issuing mortgage loans to insolvent customers. This lending practice led to a "bubble" when thousands of families failed to repay their debts.

Results of the 2008 crisis

The crisis exposed the weaknesses of Spain's economic model. Despite significant progress and achievements over the past two decades, the local economy is mired in debt. The country still has a long way to go, given the income and productivity gap between Spain and richer European countries.

Successive Spanish governments have ignored the consequences of membership in the European Economic and Monetary Union (EMU). They failed to implement structural reforms to ensure the sustainability of fiscal policy and control unit labor costs. These decisions led to a huge budget deficit during the global financial crisis.

The impact of the COVID-19 pandemic on the Spanish real estate market

The Spanish real estate market was actively recovering after the bubble burst in 2008. Demand and prices for residential properties were growing rapidly. There was hope that pre-crisis indicators were about to return. Then 2020 came, bringing with it the COVID-19 pandemic, devastating the country's economy.

Although the Spanish real estate market stalled during the first lockdown in Spain, it started to grow again after the restrictions were relaxed. In the summer of 2020, there were many virtual views of residential properties. The coronavirus has increased international demand for real estate in warm countries.

The pandemic has encouraged many people to reconsider their housing needs. Both Spaniards and foreign nationals living in apartments realized that they needed more space, as well as a garden. This idea was brought about by the lockdown, in which people were forced to live and work without leaving their homes. Therefore, the demand for villas in Spain (especially on the coast) has grown significantly.

In 2020, the average cost of Spanish real estate rose by 1.6% after a decline in 2019. In 2021, sales surpassed the pre-pandemic level, and prices continued to rise.

Real estate in Costa del Sol has received special attention from investors and end users, including:

1. Benahavis. The number of transactions increased by 92% over the year and by 117.5% compared to 2019.
2. Estepona. Sales grew by 21.5% year-on-year and by 24.8% since October 2019.
3. Marbella. Sales increased by 77.7% over the year and by 24.1% compared to 2019.

Is it worth investing in Spanish real estate in 2022?

Houses and apartments in Spain are investment-attractive in large cities and coastal areas. Currently, residential properties on the Costa del Sol, Costa Blanca, and the Balearic Islands are the most popular. Investors are interested in local housing because it brings high rental income due to the developed tourism industry. The crisis has caused housing prices to decrease, and until they have returned to the pre-pandemic level, investors have the opportunity to purchase real estate at a discount.