High inflation undermined the purchasing power of the Spanish population, which hit the country's housing sector hard, as it led to a sharp increase in mortgage interest rates. Interest rates on loans have recently become a popular topic. It may seem that these events will never end, but the Dutch banking group ING proves the opposite.
In its recent report, "Economic Outlook for 2023," ING points out that interest rate growth probably peaked late last year. As part of the report, the group also analysed the dynamics of the main economic indicators and sectors of the EU countries. According to these data, the growth of real estate prices in Spain slowed down to 7.6% in the third quarter of 2022, compared with 8% in the second quarter of the year. The average annual growth was about 7.8% last year, which is slightly below inflation.
Interest rates will continue to have an impact on European markets this year, which will further cool the residential real estate market. Overall, ING expects that housing prices in Spain will show an annual growth of about 1% by the end of 2023. However, the cooling will be gradual, as demand continues to dominate supply. The last peak of sales was last October, when there were 11% more housing sales transactions than a year earlier — in October 2021. Housing prices in Spain are not growing as fast as in most European countries, which also makes major changes unlikely.
The economy began to show signs of a decline in inflation at the end of the second half of last year, which was combined with a significant drop in energy prices. All this has allowed many customers to be cautiously optimistic about the near future. ING expects the economy to begin to stabilize, but the process will be very slow this year.
The bank also predicts a tightening of financial conditions in 2023. At the last policy meeting in December, the ECB announced that interest rates still needed to be raised significantly. The increase will have to be 50 basis points. The ECB deposit rate is 2%. This is not enough, and the increase in rates will continue. It may fall to 25 basis points, or it may return to 75. One way or another, rates will continue to influence the slowdown in economic growth in 2023.
According to ING's forecast, there will be a decrease in income and purchasing power of the population. Households will be much more careful about spending their savings, and buying a new home is likely to become secondary for most people. In this situation, the savings accumulated since the pandemic will be used in everyday life. In addition, the increase in mortgage interest rates will require additional costs from Spanish borrowers who take out loans with a floating interest rate, which make up the majority in Spain.