Anyone who scrolled through the real estate apps installed on their mobile in 2020, at the height of the Covid pandemic, saw that housing was more affordable than ever. No one bought anything at this time of maximum uncertainty and prices fell. A year later, that same person could see how the same properties he had marked on his “favorites” list had become quite expensive. Money was already moving at the rate the economy was healing its wound. This year has started just as hot, dynamic, with rising prices… but everything can change after the summer.
Alarm bells are ringing in an area as a “perfect storm” looms on the horizon with various dark clouds: one, the inflation which has eroded family income (in Spain more than in the rest of the countries, as calculated last Thursday by the OECD); another, the rise of interest rate which makes mortgages more expensive and scares away buyers (who can opt for interest-bearing savings products now that interest rates have increased); and third, the recession which is planned for the fall —in the United States has already arrived…and that it would hurt the economy, jobs and therefore housing demand.
“Citizens read the newspapers, listen to the radio… and when they are told there is going to be a recession, there is always a percentage of them who take it into account because these messages permeate and paralyze their decision to ‘purchase’, he explains to 20 minutes Luis Fabra, director of real estate studies at the University of Zaragoza. It’s colloquially known as “the self-fulfilling prophecy”: that the real estate downturn to occur would not be caused by actual market conditions, but by people’s simple fear of it happening. This fear would eventually produce the prophecy itself.
Sales slow in June
The truth is that the first signs of a real estate cooling are already showing. The National Institute of Statistics (INE) presented this Friday a 3.2% drop in home sales in June compared to May. In that same month of 2020 and 2021, operations had increased by 22.7% and 3.8% respectively.
Industry experts don’t want to talk about a contraction in the market, only moderation in demand and prices. “There will be a change of trend in the real estate sector, Of course, but I don’t think you have to be alarmist because we are starting from a very good situation, the pre-pandemic figures have been exceeded,” explains Fabra.
The data confirms these good roots: sales are on a positive trajectory (in June, they increased by 18.8% compared to the same month of 2021), more homes were sold through June than in any first half since the housing bubble era (330,997 units) and July’s price hike, according to data published this week by Fotocasahas been the most accused in recent months.
But what if the economy cools? “If we go into a recession and the GDP goes down, obviously employment will be affected as well as the purchase of houses“, advances the expert from the University of Zaragoza.
Whether the breakdown in the housing sector is more or less pronounced, says Fabra, will depend on three things: the damage to economic activity inflicted by the recession, its impact on employment and the evolution of rates. “The latest increase to 0.5% is small, but Euribor is already at 1% For what a higher increase is expected. If this happened, it would become more expensive for families to finance their homes and the demand on these households would be greater because their ability to pay is already reduced as other products in their basket become more expensive.
Housing is the biggest resource destination of any household, so getting a mortgage requires having a planned work horizon and great confidence in the future. “If that changes, people can paralyze their buying decision,” says Fabra, who considers the possibility that this year’s good deal numbers are due to people and investors who have “anticipated” their purchases precisely in anticipation that an acquisition in the coming months will be more expensive.
“It is true that the demand for housing may start to decrease and that prices may not continue to increase as much,” says María Matos, director of studies and spokesperson for Fotocasa, who points to three communities that are now increasing their prices by more than 5% annually and which could begin to moderate soon: Madrid, Balearic Islands and Andalusia. In fact, the autonomy of Madrid is already beginning to show signs of real estate fatigue: it is the only one whose sales fell in June: -6.3%, specifies the INE.
“Despite the deterioration of the economic context, the real estate sector is showing a clear upward trend”, opposite of Caixabank’s research department. The entity points out that the health of the sector has two supports: on the one hand, that the supply of housing is now lower due to everything that has been sold in recent months (in this way, the expected drop in the demand would not affect prices much); and on the other hand, that the supply of new housing is also constrained by the war in Ukraine.
“Construction costs are rising and material supply is getting worse due to global bottlenecks“, they explain from the banking entity. “The economic uncertainty, the difficulties in finding qualified labor and the evolution of prices negatively affect the start of new real estate promotions”. Visas for new constructions, in fact, could fall this year to 100,000, compared to 108,000 in 2021. Again, less supply, less demand… and therefore some price stability.
The figures processed by Caixabank speak of 550,000 sales this year, nearly twenty thousand less than 2021’s 566,000. The fall would increase next year to 490,000 operations. And the contraction will not only be due to a lower demand from the Spaniards. “Foreign demand may also be impacted by the economic slowdown in the main buyers of homes in Spain, which are the United Kingdom, Germany and France,” said the bank’s study.
Of course, the sector and the experts exclude any kind of crack in the sector like the one that occurred after the bursting of the real estate bubble of the first decade of the century. “The evolution of the market has been bullish in recent years, but prices have not increased by 15% per year as at that time,” explains Fabra.