Home purchases fall 14% in August as demand for mortgages declines and banks tighten conditions

The real estate market has chained seven consecutive months of declines in home sales, which show the parallel decline of the mortgage firm. The demand for loans for the purchase of apartments has maintained in the third quarter of the year the downward trend undertaken in the previous months, according to a survey released this Tuesday by the Bank of Spain, which also points out that the conditions of the entities financial institutions for granting credit are becoming less and less advantageous.

Home sales decreased by 14.4% in August compared to the same month in 2022, according to data published this Tuesday by the National Institute of Statistics (INE).. In the eighth month of the year, a total of 49,252 transactions were carried out, a figure that exceeds the 48,303 operations registered in July but does not reach the high marks of the months of August of the last two years, when 49,900 and 57,550 sales and purchases were close. of homes respectively in 2021 and 2022. The year-on-year drop in August is the seventh consecutive – and the most pronounced – since the real estate market began to show the first symptoms of slowdown in February.

The downward trend in sales is framed in a context of high interest rates that makes access to financing difficult. The Bank of Spain published its Bank Loan Survey this Tuesday, according to which the demand for credit fell between July and September for the third consecutive quarter, while banks continued to tighten their conditions (interest, amount or guarantees required), which have accumulated six quarters of growth.

The criteria for loan approval have not only been strengthened compared to the second quarter in the granting of mortgages, but in all loans granted to families, while in the case of companies the level of tightening has been maintained. “The restrictive evolution of the credit supply would respond to the increase in risks perceived by financial entities, a lower tolerance for them, and, to a lesser extent, the deterioration of their liquidity,” explains the Bank of Spain, which indicates that rejected credit applications have increased in all modalities.

A good part of the risks perceived by financial institutions have to do with the interest rate increases undertaken by the European Central Bank (ECB).. The institution chaired by Christine Lagarde, which meets this Thursday to continue charting the path of monetary policy in the eurozone, has agreed to ten consecutive increases in just over a year, placing the main financing rate at 4.5% and the deposit facility by 4%, both unprecedented levels since the entry into circulation of the euro.

The monetary authority argued in its last meeting that “the ECB's official interest rates have reached levels that, maintained for a sufficiently long period, will contribute substantially to bringing inflation back to the 2% objective in a timely manner.”. The institution will decide on Thursday whether the increases have actually come to an end, although it has already warned that interest rates will remain high for as long as necessary to contain prices.

Rate increases are reflected in the conditions offered by financial institutions for granting loans. In fact, the increase in financing costs is precisely among the reasons why the demand for loans maintains a downward trend, according to the Bank of Spain survey, which, in the case of households, also attributes the decline to lower consumer confidence, greater use of savings and a worse outlook for the housing market. Banks' prospects are not good, as they expect the reduction in both supply and demand for loans to continue in the fourth quarter, although to a lesser extent.

A “cyclical” behavior

On the other hand, the outlook is more optimistic in the real estate sector.. Despite the year-on-year drop in sales, the 49,252 transactions registered in August exceed the average of the last fifteen years for the months of August, which barely exceeds 37,000 operations. In fact, the data known this Tuesday is the third highest for an eighth month of the year since 2008, only behind those of 2021 and 2022. 80.9% of the homes sold in August were second-hand – a total of 39,827 -, compared to 19.1% of new properties. Operations of both used and new construction apartments fell respectively by 15.9% and 7.3% compared to August 2022.

The General Council of the Official Colleges of Real Estate Agents of Spain recalls that the figures recorded in the periods 2016-2019 and 2021-2022 were very “positive” and point to the fact that the real estate market is “cyclical”, therefore who consider the current stabilization of sales data “normal”. In that sense, the Director of Studies at Fotocasa, María Matos, maintains that there is not “a slowdown” in the market, but rather a trend towards “accommodation” to the new economic situation, with high interest rates.