After considerable adjustment in the real estate sector over the last five years, the first signs of stabilisation in housing demand are starting to be seen. For example, the data for last year published by the INE showed an annual drop in real estate transactions of 2.2% compared with 11.5% in 2012. So what factors lie behind this change in trend? And, especially, how far might they go?

One initial factor to consider is the recovery in foreign demand. According to the Ministry of Public Works, transactions carried out by foreigners rose by 12.8% last year, reaching 49,451 in total. Given that domestic demand continued to fall, the relative share of foreign demand has increased considerably, going from 6% in 2009 to 16% in 2013.

This dynamism in foreign demand has occurred mostly in those provinces with a large supply of second homes. 88% of the properties acquired by foreigners over the last two years have been located on the Mediterranean coast or in the Canary or Balearic Islands, helping to reduce the excessive supply in an area that concentrates more than 50% of the total stock of new homes for sale.

This surge in foreign demand is also helping to slow down the fall in house prices. Both large cities, which have a smaller supply of excess housing, and coastal areas are at a more advanced stage in the real estate cycle. This can be seen by the real estate clock, which places both regions in the stabilisation phase, characterised by an upward trend in transactions and a deceleration in falling house prices. The rest of the country, however, is still lagging behind in the cycle.1

The recovery in domestic demand is gradually adding to this good performance by foreign demand. The change in trend in the labour market and particularly better economic prospects should see sales ending the year with positive growth rates. This is suggested by the trend in the intention to purchase a home within the next 12 months among Spanish consumers, which has bottomed out and even seems to be set on a tentative upward path.

1. For more information on the real estate clock, see the Focus «The real estate clock: time to get up?» in the Monthly Report from October 2013.