In the first months of 2023, housing prices showed amazing resistance to the prevailing economic trends. Unfulfilled pessimistic forecasts required rethinking and changing forecasts for the local market. It is quite possible that by the second half of the year prices will still rise by 5% or a little more. This will be a fairly noticeable slowdown to 8% in the first quarter.
At the same time, prices may decrease by 3% by the end of 2023, and by 2% in 2024. This is already a more pessimistic forecast than it was earlier, when 1% growth was expected this year and stagnation by 0% in 2024. If the forecast is justified, and the wages of the population will grow by more than 2%, then the market will receive a balanced development, adequately leveling the excessive price growth in recent months. Today, housing prices exceed the average income per Spanish household by 8.5 times. The average maximum of the last 20 years was 7.5 times.
In any case, there is no need to worry. Such an adjustment is far from the fall recorded in 2007:
- According to Idealista, current prices in Spain are still 11% lower than 2007 prices, and gross household disposable income has increased by 15% since then%;
- The mortgage lending rate is about 35% versus 50% in 2007;
- The ratio between housing prices and household incomes is 8.5 times compared to 9.5 times in 2007.
This will allow the market to overcome the current economic problems relatively painlessly. The main triggers of the correction are the following:
- Increase in the cost of mortgage lending. Thus, the 12-month Euribor rate increased from -0.5% in December 2021 to +2.5% in February 2023. According to forecasts, the rate will exceed 3% in the coming months. This means that the increase in the cost of a new mortgage loan is about 360 euros per month (an average of 144,000 euros in Spain).
- Reduction of household savings. Strong inflation for basic consumer goods, such as electricity and food, has already significantly reduced the purchasing power of Spanish citizens. Of course, this led to a decrease in the norm in the whole country. If we turn to the middle of last year, then at the end of the second quarter, wages in Spain increased by 2.2%, and inflation was 10.5%.
- There was a sharp increase in the internal rate of return (IRR) of 10-year bonds in the country, which made investments in rental housing less attractive. The gross yield of rental housing on average in Spain remains at about 3.7%, while the yield of 10-year bonds rose from 0.55% to 3.5% in just three months from December 2022.