MOST buyers and sellers I speak to these days keep mentioning the possibility of a downturn ahead. How could they not?
Just look at the news and there are daily reminders about economic headwinds, including in the real estate sector.
I’m sure you know the drill: inflation and rising interest rates, a looming recession, war in the Ukraine and tensions with China.
Yet, at the same time, there remains a lot of optimism in the Spanish property market and in the economy more generally that current problems are short term and temporary.
Which version of reality is true and what does it mean for the Costa del Sol housing market? Should we be optimistic or pessimistic?
Let’s start with the bad news. Inflation has risen due to a number of factors. Some arising from Covid and the damage to supply chains after restrictions were lifted. Others from inflationary spending during attempts to stop economies from tanking and people going bankrupt.
Of course, there’s also the effect of the war on fuel costs and to try to rebalance the economy, central banks internationally have raised interest rates repeatedly this year.
Whether it works or not, interest rate hikes have a significant impact on the real estate market, in particular as they depress demand by raising the cost of borrowing.
There is more bad news when you begin to look at the Costa del Sol customer base, for example Sweden which represented 14% of Malaga province buyers.
THE CASE OF SWEDEN
In Sweden, 10-year mortgage rates are now between 4.44% and 4.9%.
On a €200,000 loan that means €1111/month in debt payment.
A big jump in a year when the same mortgage could be had for 1.5%, giving payments of under €800/month.
And Swedish interest rates are still rising and rates are expected to reach 3.5% to 4% at the very least.
With the premium that banks charge on top of the prime rate, there could be mortgage rates of 6% before the increases end.
As a result Swedish home prices and sales are plunging in response. Prices for homes have declined by over 11% since March. The Riksbank predicts that the price declines will continue indeed up to 19.9% by late 2023 from their peak.
The reason is clear: Swedes are deeply in debt with a ratio of just over 200% debt to net income. In fact, all the Scandinavian countries have very high debt to net income ratios.
The only other country in the same league is Holland, with a 222% debt to income ratio.
There have also been unsustainable price increases, with Sweden seeing an absurd 32% since 2019, while Holland’s are up by 40%.
It is because of this imbalance between debt and income, and the unsustainable growth in prices, the Economist, recently sounded the alarm. “Housing busts and recessions that are preceded by this sort of debt build-up tend to be more severe. With central banks now raising rates at the fastest pace in more than four decades, countries drowning in mortgage debt will once again be exposed to nasty consequences.”
SOME SPANISH SUNSHINE
But don’t panic. Now, the good news.
Here in Spain the housing market, which suffered one of the worst crises in the western world in 2008-2014, is in much better shape.
The experience of that crisis had an impact on the behaviour of sellers and buyers, as well as on the broader market, which makes it one of the most resilient in Europe.
Household debt is now less than half what it is in Sweden and Holland. In fact, it fell by 50% between 2010-2020, to just over 100% of net disposable income.
In addition, as the market recovered in 2015 from a crisis that saw prices fall a catastrophic 37%, Spaniards began switching to fixed rate mortgages.That ensured they would be protected from exactly the type of swings in interest rates that we’re seeing today.
Some 72% of mortgages are now fixed, compared to almost 100% variable rate mortgages just prior to the crash.
In contrast, in Finland, 96% of new housing loans have variable interest rates while in Sweden it is 48% of new loans
Moreover, Spanish prices have never fully recovered from the last crisis and are mostly still significantly below the 2007 peak.
Even with the post-Covid rebound, prices only rose 5.5%. In other words, Swedish house prices increased almost six times as much.
There is a consensus that price increases in Spain will ease over the next two years as the economic problems work themselves out. And there is likewise a consensus that Spain will do better than most.
However, what is not certain is what exactly that means.
Bankinter believes that prices will fall 3% next year and then 2% in 2024. ING, on the other hand, believes that prices will grow by 1% in 2023 after rising by 7% in 2022.
That still means a real reduction in prices, given that ING expects inflation in 2023 to ease to 4.4%; that is, a 3.4% fall in real prices.
That is, in any case, better than the average of a 9% decline in prices that the European Central Bank expects to take place across the Eurozone as a whole.
In the UK, market analysts expect housing prices to fall by 5-10% next year alone.
So, Spain’s real estate market is in a better position structurally than most of Europe.
There are other elements to consider as well. For instance, Spanish interest rates are likely to remain substantially lower than in other jurisdictions, likely up to 3.6% for fixed rates and 4.1% for variable rates before stabilising (according to ING).
This compares with Swedish fixed mortgage rates moving above 5% and those of the UK also remaining between 5 to 6% over the next two years.
That makes Spanish money cheaper to borrow for people from those two countries and Spain’s cheaper housing and mortgages could be an alternative to more volatile markets at home. Let’s hope so.
It is also a good thing the Junta has made the region a more attractive destination by cancelling wealth tax, which penalised foreigners who had properties abroad.
In conclusion, I think that there’s plenty of reasons to remain optimistic. I expect that real estate on the Costa del Sol, especially at the higher end, will feel few effects compared to northern Europe. And while, yes, price rises will moderate, we’re unlikely to see a significant decline. Stability and sunshine are my key takeaways then, this year!