In 2023, Spanish families who fantasized about buying an apartment came face to face with reality. The real estate market closed the doors in their faces as the European Central Bank (ECB) raised interest rates. Buying a flat, the quintessential aspirational milestone of the Spanish middle class, has become almost impossible for tens of thousands of households.. And everything indicates that this will also continue to be the case in 2024, a year in which the real estate sector will be affected by the same dynamics that have marked 2023: expensive mortgages, fewer sales, but still high prices that will barely move.
Changes in the real estate market have happened at great speed. Let's put ourselves in the shoes of a family that was starting to buy an apartment in January 2022. At that time real estate was going from strength to strength.. 52,902 home sales were closed and more than 36,000 mortgages were granted. The interest on the new loans granted was around 1.44% and an average household made up of two adults could take out an average variable mortgage (150,000 euros for 25 years) allocating 20% of their income to it.
The current panorama is radically different. The initial interest on new loans has shot up to 3.85%, well more than double what it was when it started in 2022. In October 2023, that same average-income household would have to dedicate 33% of its income to paying a typical mortgage of 150,000 euros (13 points more). With these figures, the number of households that meet the requirements demanded by banks to access a mortgage has been drastically reduced.
Consequently, the rise in mortgage prices and the closing of the banks' credit tap have erased the middle class from the real estate equation.. Home sales have plummeted by 17% compared to January of last year and the granting of mortgages has fallen by 22%. In this scenario, it could be expected that prices would have been reduced, which usually happens when demand falls. Nothing is further from reality. Although price increases have moderated, in the second quarter of 2023 house prices were 3.6% higher than in 2022.
More of the same in 2024
Next year, experts predict that the situation will be quite similar to that of 2023. In 2024, obtaining a loan to buy a home will continue to be very expensive, if not impossible, for middle-class households. The markets take it for granted that the ECB will begin to lower interest rates in the middle of the year, but it will take time until this is transferred to the financing conditions of families.. Furthermore, we must not forget that the uncertain economic context, with a Europe in which the GDP has been stagnant for a year, will discourage banks from opening the lending tap again.
“I don't think mortgages will recover next year in a special way, families will continue to have problems buying,” says José García Montalvo, professor at the Department of Economics and Business at Pompeu Fabra University.. Of course, García Montalvo clarifies that in some areas there will already be significant price drops. “We will see a more evident effect on prices than has been the case until now,” he adds.
“Prices are not falling as much as they should based on what we are seeing with sales,” says Josep Maria Raya, professor at the Tecnocampus at the Pompeu Fabra University specialized in real estate matters.. But why does this happen? How is it possible that in a market in which demand has reduced, prices have continued to rise?
One of the keys is the inability of the Spanish real estate market to produce enough new housing to accommodate all the households that are formed each year.. A recent study by the Bank of Spain indicated that in the coming years some 200,000 new homes will be formed each year, while new homes entering the market are around 100,000.. Half of the expected demand. Although the stock of empty housing in Spain is considerable—almost four million, according to the latest estimate by the INE—only one in ten is found in cities with more than 250,000 inhabitants.
Another reason that explains why prices remain high and will not reduce in the short term is because of who the buyers are who keep the real estate market alive.. If we look at individuals, the remaining buyers are families that already have significant assets with which to guarantee the operation, which allows them to request smaller mortgages. “Normally, they are replacement purchases, because the family has grown and needs one more room…” says García Montalvo.. Furthermore, there are still large investors in the market, especially in large cities, with the capacity to undertake large purchases.
More tension in the rental market
Another consequence of the expulsion of the middle classes from the real estate market occurs in the rental market.. Households that under normal circumstances could have afforded to buy, but now cannot due to high financial costs, will have to resort to renting.. A market that is already very saturated due to the lack of supply and enormous demand, especially in large cities.
This only adds more pressure to prices, which seem even less likely to be reduced in the short term.. “It is very difficult for us to see rentals with price reductions. We would have to go to a very bad economic situation. The normal thing is that we continue with significant price tensions,” concludes Josep Maria Raya.