The data published on the performance of the residential real estate market in the first half of 2023 have been confirming the sector’s expected change in trend. The main causes of this change in cycle are the gradual disappearance of the temporary pandemic-related support factors (a change in residential preferences and enforced savings due to the brakes on consumption) that drove housing demand in 2021 and 2022; persistent inflation, which erodes the purchasing power of households, and rising interest rates. As a result, the number of house sales recorded its first negative year-on-year rate of change in December 2022 (–10.2%) and, except for a hiatus in January, continued to be negative until April (latest available data). So far this year, house sales are down 3.4% year-on-year to the figure of 642,000 in April (12-month cumulative). This decline was observed in both the segment of new builds (–4.0%) and also second-hand properties (–3.3%). However, sales are still 16.7% above the level for the same period in 2019, in spite of this drop from the exceptional figures posted in 2022 (650,000).

For a more rigorous assessment of the degree of the slowdown in house sales, we have seasonally adjusted the original data series (i.e. we have eliminated variations due to seasonal effects) and calculated the month-on-month changes in the seasonally adjusted series.¹ The chart below shows that, since last June, the month-on-month change has been negative over several months. Since these monthly variations present some volatility, we have also calculated the momentum² of the seasonally-adjusted series. In April 2023, momentum stood at –7.4%, while in February it reached –15.2%, an improvement thanks to the fact that the last two records were slightly positive in seasonally-adjusted terms, suggesting that the rate of decline is still quite moderate for the time being.

By type of buyer, foreign purchases are holding up considerably better than purchases by Spaniards, both for main residences and second homes.³ Specifically, the number of foreign purchases fell by just 2.7% year-on-year in Q1 2023, compared to –9.0% for second home purchases and –12.1% for main residence purchases by Spaniards. In addition, this good performance by foreign purchases comes after a strong rally in 2022, when sales grew by 30.7% compared to 6.4% growth for the total, substantially increasing their share of all purchases (19.5% according to MITMA and 14.5% according to the College of Registrars in Q1 2023). In the article «Buying a home in Spain and taking out a mortgage as a foreigner» in this Sector Report, we analysed the resilience of foreign buyers to rising interest rates, a phenomenon that is partly explained by the fact that such buyers are less dependent on credit when buying property.

Mortgage market data do show more palpable signs of the impact of rising interest rates. The mortgage interest rate stood at 3.97% in May 2023 compared to 1.62% a year earlier,⁴ while the number of mortgages fell by 8.4% year-on-year in the year up to April and, over the same period, the amount of new credit granted to households for house purchases (without renegotiations) fell by 22.7% year-on-year. This drop in demand for new credit, together with the growth in extraordinary prepayments, has meant that the outstanding balance of mortgage credit has begun to fall (–2.1% year-on-year in April). We have also observed an increase in mortgage renegotiations, which now account for 7% of new transactions and are well above the average for 2017-2019 (3.6%).

Supply is still very limited and not enough to meet the housing needs considering current demographic trends. The number of new building permits (109,000 homes in the last 12 months up to March) remains well below the net creation of households (241,000 in the last four quarters up to Q1 2023, according to the Labour Force Survey or LFS). It should be noted that this dynamic household creation rate reflects the substantial number of immigrants arriving in Spain (whose foreign population has grown by 452,000 people in the cumulative figure over four quarters up to Q1 2023, according to the LFS), which explains the high demand for housing in Spain’s most economically active regions.

Despite this insufficient production of housing, leading supply indicators remain rather weak and do not point to a change in trend in the near future. Cement consumption grew by a meagre 1.2% year-on-year in the cumulative figure up to May, while residential investment rose by a modest 0.6% year-on-year (0.1% quarter-on-quarter) in Q1 2023 and is still very contained as a percentage of GDP (5.4%), well below the pre-pandemic level of investment (–9.5% vs. Q4 2019). On the other hand, some indicators offer slightly more positive signs: confidence in the construction sector has improved slightly so far this year, while labour market data for the construction sector also show a favourable trend (the number of construction sector workers grew by 4.6% year-on-year in the year up to May).

One very significant constraint on supply is residential construction costs which, although still high, are beginning to show signs of moderating. After double-digit growth in mid-2022 (reaching 19.5% year-on-year growth in May 2022 according to MITMA), they are now posting more contained rises of 6.0% year-on-year in March (latest available data). The notable drop in industrial metal prices on international markets (the benchmark LME index has fallen by 30% since its peak in April 2022) and the fall in energy prices (remember that the production of a large number of building materials is highly energy-intensive) suggest that this downward trend in costs will consolidate in the coming months. Specifically, according to our projections (which take into account the prices of commodity futures markets on international markets and our oil price forecasts in euros), residential construction costs in Spain could start to decline in August and fall by around 5% on average in 2024 (in the absence of new shocks). Despite this drop, however, costs would still consolidate at a higher level than before the shock (about 16% above the January 2021 level).

The greater resilience seen in demand, especially by foreigners, the shortage in supply of new housing and high construction costs have all been driving house prices in recent quarters despite the sharp rise in interest rates. House prices (according to the appraised value published by the MITMA) grew considerably in Q1 2023 (2.2% quarter-on-quarter vs. 0.5% in Q4 2022) although in year-on-year terms the rate of growth continued to slow (3.1% year-on-year vs. 3.3% in Q4 2022). In the same vein, the INE house price index (based on transaction prices) also posted a significant rise in Q1 2023 (0.6% quarter-on-quarter, 3.5% year-on-year), in contrast to the decline recorded in Q4 2022 (–0.8% quarter-on-quarter).

All the autonomous regions posted positive year-on-year rates of change in house prices in Q1 2023, although the growth rate still varies greatly. At the high end are the Balearic Islands with a year-on-year increase of 7.3%, while Murcia is the region reporting the smallest increase in Q1 2023 (0.4% year-on-year). The price of new builds is growing more vigorously than that of second-hand housing (6.0% and 3.0%, respectively, in Q1 2023), a pattern observed in all the autonomous regions and explained by the relative scarcity of this type of housing and the need to pass on the higher construction costs.

House prices in municipalities with more than 25,000 inhabitants also recorded a somewhat more positive trend than in the previous quarter: the percentage of municipalities with a negative year-on-year change was 15% of the total in Q1 2023 (compared to around 25% at the end of last year). The percentage of municipalities with a year-on-year rise in house prices of more than 10% was 13.4% in Q1 2023 (compared to 6.5% in Q4 2022). Likewise, house prices grew more strongly in tourist municipalities (5.7% year-on-year) than non-tourist municipalities (4.8% year-on-year), a fact that reflects the strength of foreign demand.

The second half of this year will be key to determine to what extent the cumulative rise in interest rates has a more or less significant impact on the economy as a whole and, in particular, on the real estate sector. With a 25 bp hike in June, the ECB has now increased its benchmark interest rates by 4 bp since July 2022. Moreover, spurred on by the inertia of underlying inflationary pressures, the ECB is hinting at another interest rate hike in July, up to 3.75% for the depo rate and 4.25% for the refi rate.⁵ At CaixaBank Research, we believe that a further increase in benchmark rates is also possible and we expect that, once they reach their peak, interest rates will remain at these levels until mid-2024. A few months earlier, however, we should start to see some downward movement in the 12-month Euribor.⁶

However, there are also several countervailing factors that will continue to support housing demand and prices, including a resilient labour market (we predict that 390,000 jobs will be created in 2023 and 270,000 in 2024 in terms of the total LFS workforce), falling inflation (below 4% in 2023) and more dynamic wage growth (around 4%-5% in 2023 and around 3.5%-4% in 2024). Likewise, substantial migratory inflows (the INE estimates that, in 2023 and 2024, Spain’s foreign population will increase by around 490,000 people per year) will continue to sustain demand for housing in those areas of greatest economic activity.

It is also worth remembering that the sector’s fundamentals are much more robust today than in the previous expansionary cycle (there is no oversupply, there has been no excessive growth in credit nor have credit standards been relaxed) and the growth in house prices in previous years was fairly stable, much lower than in other advanced countries (see the article «Real estate markets in advanced economies in the face of monetary policy tightening» in this Sector Report).⁷ All this suggests a slight moderation in the pace of price increases and a normalisation of the volume of sales during the period 2023-2024, and we do not expect any sharp adjustment in the market such as the one observed in the period 2008-2013.

Turning to demand, we expect purchases to decline sharply in the coming months, falling to around 500,000 in 2023 as a whole, a figure similar to that recorded in 2019 but 23% lower than in 2022 (650,000). This forecast has recently been revised upwards (previous forecast:⁸ 480,000) due to a smaller than expected drop in purchases in the first few months of the year. By segment, the largest adjustment is expected in purchases of second-hand homes. In contrast, the number of purchases of new builds will remain within a similar range to the previous year (about 110,000 homes, in line with the number of housing starts in the last 12-18 months).

Similarly, we also revised upwards our house price forecast due to the good Q1 data published. Specifically, we substantially improved our annual projection for 2023, from 1.0% to 2.9% (appraised value, MITMA) and from 1.7% to 2.1% (transaction price, INE). Despite these upward revisions, however, we must remember that they are due to the good performance observed to date and to prices resisting any decline in the short term. Looking ahead to the coming quarters, and in line with the weakening of demand and the economy in general, we continue to expect a significant slowdown, as reflected in our forecasts for 2024 (1.1% for both indicators).

Finally, housing supply will remain very limited (forecast: 90,000 new building permits in 2023), much lower than net household creation (241,000 in the last four quarters up to Q1 2023, according to the LFS). The signs of demand cooling down, new legislation, structural problems in the sector and construction costs remaining high despite their recent moderation do not suggest that this deficiency in housing supply will be reversed in the coming quarters.