Spain’s real estate market slowed during the course of 2023, but the pattern was much more positive than had been anticipated at the beginning of the year. A year on, we can say that the real estate market has held up much better than predicted in an environment of high interest rates. This resilience can be attributed to several supporting factors, which we outline below.

Firstly, it should be noted that the performance of the Spanish economy as a whole in 2023 has also been much better than expected. GDP grew by 2.5% for the year as a whole, a significant figure and well above what had been anticipated at the end of 2022 (1.0%). This positive surprise is mainly explained by the faster than expected fading of the energy crisis, as well as the strength of Spain’s foreign sector, which is closely linked to both tourism and non-tourism services.

The buoyancy of the Spanish economy has been reflected in excellent figures in the labour market in 2023: the number of people in employment grew by 783,000 and the unemployment rate fell by more than 1 pp to 11.8% in Q4 2023 (versus 12.9% at the end of 2022). The temporary employment rate has also fallen dramatically in recent years (16.5% in Q4 2023 compared to 26.3% in 2019), and this will encourage people to buy a home, since workers on permanent contracts tend to have better access to mortgages than those on temporary contracts. Remuneration per employee has also improved, with wage rises of around 4% according to CaixaBank Research’s wage indicator.¹ Household income thus rose significantly (11.4% year-on-year in the first three quarters of 2023), exceeding inflation in this period (3.6%).

The strength of the labour market has attracted significant immigration flows. In 2023, the foreign population residing in Spain grew by 544,000 people (709,000 if we include those with dual nationality); such high figures had not been recorded since the real estate boom that culminated in 2008. This population tends to be located in areas of greater economic activity, such as large cities and tourist areas, driving up the demand for housing in these locations, as we will see in the second article of this report, «Population and home prices in Spain: a close relationship».

Another factor that has sustained the real estate market is the fact that household finances have been under less stress than expected. In particular, the household indebtedness ratio fell to 76.5% of gross disposable income (GDI) in Q3 2023, its lowest level since 2002 and 12 pps below the EU average (89%). The lower household indebtedness, the high percentage of fixed-rate mortgages in recent years (71% in 2022) and the buoyancy of incomes have limited the impact of the rise in interest rates on households: the interest burden increased by just 0.5 pps of GDI between Q4 2021 and Q3 2023, standing at 1.7%.² However, households with variable-rate loans and those that have borrowed recently have had to bear higher interest costs, although it is expected that they will fall during the course of this year as benchmark interest rates for variable-rate loans come down.³

These factors have sustained the demand for housing and mitigated the negative impact of rising interest rates. Therefore, despite the fact that home sales fell by 9.7% in 2023 to 587,000 units, they remain above both pre-pandemic levels (+16.1% versus 2019) and the historical average (470,000). By segment, the biggest drop is found in sales of existing homes (–10.8% in 2023 compared to –4.8% for new home sales). In 2023, sales of new homes represented 17.9% of all transactions (20.1% in 2022).

Sales made to foreign buyers, which rose sharply in 2022 to record levels (94,500 homes according to the Association of Registrars), are declining at a slower rate than sales made to Spaniards buying primary residences and second homes. According to sales data from the Ministry of Housing and Urban Agenda (MIVAU, formerly MITMA), the number of purchases made by foreigners fell by 8.7% year-on-year in the first three quarters of 2023, compared to declines of purchases by Spaniards of –11.8% in the case of second homes and –15.0% for primary residences. This better relative performance among foreign buyers has led to their share of the total number of transactions significantly increasing (20.2% according to the MIVAU and 15.4% according to the Association of Registrars in Q3 2023).⁴

The impact of higher interest rates on the mortgage market has been somewhat greater. The number of mortgages fell by 17.8% in 2023, and new loans granted to households for home purchases, by 18.6% in the same period, although both indicators remain above 2019 levels. Thus, the decrease in mortgage credit is greater than that of sales, which reflects a change in the nature of home buyers, as those buying replacement homes, foreign buyers and investors, who tend to have the resources to fund the purchase themselves, assume a more prominent role. Thus, the ratio of the number of mortgages to the number of sales has fallen significantly (65.0% in 2023 compared to 71.4% in 2022).

In the mortgage market, interest rates on new mortgages have remained relatively restrained despite the increase in official interest rates and market benchmark rates, such as the 12-month Euribor. Fixed-rate mortgages, for example, were granted at an average rate of 3.5% in the second half of 2023, while the Euribor exceeded 4% in this period.

In mid-2022, when the ECB began the new cycle of interest rate hikes, home prices began to slow down and continued to do so until the first half of 2023. However, in the second half the growth rate increased again. Specifically, the appraisal value of unsubsidised housing (per MIVAU) increased by 1.1% quarter-on-quarter in Q4 (versus 0.3% in Q2 and 1.1% in Q3) and the year-on-year change accelerated from 4.2% in Q3 to 5.3% in Q4. The home price index published by the National Statistics Institute (based on sale transaction prices) followed a similar pattern: significant growth in Q3 (2.5% quarter-on-quarter versus 2.1% in Q2) and an acceleration of the year-on-year change (from 3.6% in Q2 to 4.5% in Q3). The resilience of housing demand (which despite declining remains high) and the limited supply of new housing are the main factors behind the resistance of home prices in nominal terms. In real terms, the reduction in home prices has been considerable (–2.8% in 2022-2023).

By segment, the price of new homes is growing much more rapidly (11% year-on-year in Q3) compared to existing homes (3.2%). This is due to the relative short supply of new homes, a greater preference for this type of housing and the fact that residential construction costs have consolidated at high levels (up 3.7% in 2023 after increasing by 20% in 2021-2022).

Despite the sustained growth in home prices, it should be noted that there are no clear signs that Spain’s real estate market is overvalued. According to the Bank of Spain’s Financial Stability Report published in autumn 2023, indicators for imbalances in home prices are close to the neutral level. Indeed, the level of alert regarding the real estate sector signalled in previous reports was lowered. In fact, for the economy as a whole, home prices are increasing slower than the median household income, such that the affordability ratio has decreased slightly in 2023 (from 7.83 in Q4 2022 to 7.54 in Q3 2023). However, it should be noted that in certain locations, such as tourist areas and urban centres, housing affordability is a challenge for domestic residents. Recently, the European Systemic Risk Board (ESRB) has published a follow-up report on vulnerabilities in the residential real estate sectors of European countries⁵ in which it is mentioned that home prices are moderately overvalued in Spain. However, it considers that the level of vulnerabilities accumulated is low, so it is deemed that no macroprudential measures are required for the time being.

The number of new construction permits is practically stagnant (–0.2% year-on-year between January and November 2023, placing it at 109,000 homes in the last 12 months). This is actually a very encouraging figure, given the unfavourable context for new housing production: construction costs have remained high, financing costs have increased and there was some uncertainty about the resilience of demand to the sharp rise in interest rates. However, supply remains well below structural demand due to demographic trends (the net creation of 287,000 households in 2023, according to the LFS, due to the significant increase in migration flows), an aspect which we analyse in the article «Advanced-economy real estate markets: home price resilience and supply shortages» in this same Sector Report.

At CaixaBank Research, we have improved our forecasts for Spain’s real estate market in 2024-2025 due to the resilience of the real estate market in 2023, the improvement of the economic outlook for 2024 and the prospect that the ECB could begin to lower interest rates before the summer.

In fact, the expectation that official interest rates in the euro area will fall during 2024 has already begun to be reflected in market interest rates: the 12-month Euribor fell to 3.6% in January 2024, having reached the peak of this cycle in October 2023 (4.16%). The financial markets are assigning a high probability to the first interest rate cuts occurring in April and are anticipating between 5 and 6 cuts during 2024 as a whole. However, at its meeting on 25 January, the ECB reiterated that further progress is needed in the disinflationary process and, before taking steps, it wants greater assurance that inflation is indeed returning to the target. Therefore, at CaixaBank Research we think it is more likely that interest rates will begin to fall in the middle of the year.⁶ In any event, current expectations suggest that interest rates will remain notably above the levels of 2021, before the monetary tightening cycle.

In addition to the fall in interest rates, the economic factors that have supported the real estate sector in 2023 will remain present in 2024, although they will lose some intensity. The Spanish economy will continue to enjoy significant growth, although it will slow down relative to the 2.5% registered in 2023. This economic activity growth will lead to job creation, but at a more moderate pace than in 2023. Wage increases will remain strong, slightly above inflation, allowing households to regain the purchasing power lost in recent years. Finally, household finances will continue to be favourable, in a context in which the reduction in interest rates will begin to ease the interest burden on families.

Taking all these factors into account, at CaixaBank Research we anticipate that the number of sale transactions will maintain the current trend of gradual decline, ending up at around 550,000 homes in 2024. This is below the estimated figure for 2023 (590,000) but significantly higher than the previous forecast (510,000). Also, we expect home prices to slow from the 3.9% for 2023 to 2.7% in 2024, although in any case it will be a much more modest slowdown compared to the previous forecast (1.1%). Finally, the housing supply will continue to experience very moderate growth, from the estimated 110,000 construction permits for 2023 to 115,000 in 2024, given that the current factors that are preventing a further revival of supply will remain present (high construction and financing costs, although they are likely to descend). Looking ahead to 2025, we believe that housing production could increase somewhat more steadily if the right conditions are in place – a matter of vital importance for responding to the growing demand.