At the moment, few people have doubts about the onset of a new recession in the global economy. Many wealthy individuals, investors, and companies are actively searching for "quiet bays" for their savings. Various assets are being used, including real estate. However, what should those who want to buy real estate purely for their own use do? Is it a good time now? What things should I know about?
To date, an ordinary buyer needs to keep in mind three key points of the right choice of real estate, especially in the case of buying apartments:
- To be patient in anticipation of a possible fall in prices associated with the economic downturn of global markets;
- To conduct a sound and thorough risk assessment with the help of professionals;
- To have access to a mortgage loan with a fixed rate, which will establish a stable level of payments with the growth of Euribor.
In the last couple of years, the global residential real estate market, like specifically the Spanish one, has been experiencing a period of record price growth — unprecedented in the last 15 years. Prices are rising for both existing housing and new construction. The latter is especially becoming more expensive due to the shortage of building materials on the market.
Back in Q2 2022, a square meter of new development reached a cost of 2,035 euros, according to the Association of Cadastre and Registration of Real Estate in Spain. The price gap between new housing and the secondary market will continue to increase.
Today it is worth noting that the record holders for prices in the secondary market segment are the cities of Madrid, San Sebastian, Pamplona, Palma de Mallorca, Malaga and Las Palmas de Gran Canaria. The latter became known from the data provided by the Idealista real estate portal.
The described trends are also observed in the rest of Europe. Nevertheless, the European Central Bank (ECB) predicts a drop in real estate prices due to falling demand and a decrease in the inflow of investment into the housing market in the eurozone. The latter will be associated with an increase in interest rates on lending, including mortgage. ECB expects house prices to fall by 9% with a one-point increase in interest rates.
The forecast prepared by Atlas Real Estate Analytics ("Research and forecast of the Spanish housing market indicators") indicates that by the end of 2022, the number of real estate transactions on the market will be 2.3% of the results of 2021. However, by the end of 2023, sales will fall by 15.4% compared to 2022.
The current situation of incredibly active price growth can plunge a sufficient number of potential buyers into panic and force them to make a rash purchase — you need to be patient and wait for the upcoming cooling of the market. At the same time, it is also not worth pulling, because the recession is hitting not only the markets, but also the incomes of the population and their ability to purchase new housing. In addition to the property, it is necessary to cover the costs of fees, taxes, including VAT, the costs of attracting specialists.
It is also worth noting an important condition when obtaining a mortgage loan to finance the purchase — the mortgage amount should not exceed 80% of the final value of the property, while the monthly payment should not exceed 30% of the total income of the household that opened such a loan.
It is necessary to remember and create a reliable financial safety cushion. Without proper preparation, it is easy enough to get into a situation where it becomes necessary to resort to taking "microcredits", loans with predatory payment conditions or even contact friends and relatives to continue to cover payments for purchased housing.
This may seem obvious, but according to the Central Bank of Spain for the second quarter of 2022, almost every tenth mortgage loan was taken for an amount significantly exceeding the specified 80% of the real estate price. These loans, of course, required much more than the specified 30% of monthly income, putting borrowers in an extremely vulnerable position.
Q1 2023 proved to be much better, when mortgage loans covered, on average, 65.2% of the property price. Such a difference between quarters indicates a rapidly growing panic among buyers. People began to make desperate purchases more often, in an attempt to catch up "before it becomes too expensive".
At the same time, even these data for the first quarter are still higher than the previous record — 63.8% in 2007, shortly before the collapse of the bubble in the real estate market. Unjustified loans are harmful not only for each individual buyer, but also for the entire economy as a whole.
So far, the banks themselves are on guard of economic stability, which are more cautious about lending and are trying to reduce the overall level of toxic loans in the economy to a minimum. The number of risky loans is still 9% of the total, but this figure does not show trends for large growth.