A change in trend for the real estate sector
January 25th, 2023
- A year has just ended in which the demand for housing exceeded all expectations. The number of sales had already been growing strongly since the second half of 2021, mainly due to a change in preferences regarding where to live as a result of the pandemic. However, this growth intensified further in the first half of 2022 as buyers brought their purchases forward in order to take out a mortgage at a more favourable fixed interest rate in view of the prospect that the ECB would raise interest rates to deal with galloping inflation.
- As expected, in the summer of 2022 the ECB embarked on a cycle of benchmark interest rate hikes, resulting in a steep increase in market interest rates. The 12-month Euribor rose by about 330 bp in 2022 and this will have a direct impact on demand. Specifically, we forecast a decline in the number of housing sales of about 20%, down to 480,000 homes in 2023, although this number would still be higher than the average since 2007 (450,000). Likewise, house prices slowed down throughout 2022, a trend we expect to continue in 2023 as a result of waning demand (due to higher interest rates) and a worsening economic outlook. There are also signs of prices becoming less dynamic in some segments in the commercial real estate market (see the article «Given the current economic scenario, commercial real estate market goes into ‘wait and see’ mode» in this Sector Report).
- Our scenario for the Spanish economy assumes a pronounced economic slowdown (1% GDP growth in 2023 compared with 4.5% in 2022) but not a recession. In this scenario, we expect house prices to maintain a modest positive growth rate in nominal terms (around 1%). We also still believe there is little risk of any sharp adjustment in the real estate market because the fundamentals are much stronger than in the previous expansionary cycle for Spanish properties: from 2014 to 2022, growth in house prices was moderate (2.2% per year), there is no oversupply (quite the opposite) and, on the whole, no signs have been detected of excessive household debt. We examine these factors in detail in the first article of this Report.
- The supply of housing is still very limited and not enough to cover structural demand due to the creation of new households. The second article of this Report («What big data reveal about the supply of new housing and demographic trends in Spain») analyses this shortage in supply using geolocation data from new building permits. It comes as no surprise that the supply of housing is insufficient in those municipalities with the highest population growth, such as large cities, the islands and Mediterranean coastline. This situation is very likely to worsen in 2023 as the economic slowdown, high construction costs and waning demand will restrict growth in housing supply. In the article «How will construction costs evolve in Spain in 2023?» we demonstrate that, provided there are no new shocks and considering the trend observed in industrial metal prices on international markets and futures prices of the London Metal Exchange (LME) index, construction costs in Spain will tend to fall in 2023, although they should still remain above their pre-pandemic level.
