The year 2023 will end with a seemingly contradictory balance in the real estate market: mortgages are falling and the volume of transactions is suffering after a year as significant as 2022. However, prices continue to rise, driven by a demand that is still higher than the dwindling supply.
The Housing Law has not only failed to meet the objectives set by the government but has had a devastating opposite effect: it was intended to solve the rental problem and has led to unknown levels of suffering for tenants. The new regulation has collapsed supply, and prices have continued to rise sharply. Moreover, there has been a significant shift from permanent to seasonal rentals, making it even more difficult for renters to access housing, especially families with children. With a continuist political environment, these trends are not likely to change in 2024.
The property market
Property prices
Price reductions that many have been listing for this year have not arrived, and the cost of buying a home in Spain has increased by 7% in the last year.
In some very dynamic markets, such as Madrid or Barcelona, prices have reached extremely high levels, causing price increases to be more moderate and closer to inflation.
The upward trend has been much more marked in the Mediterranean arc and the Balearic Islands, possibly driven by international demand with high purchasing power.
In Alicante and Palma, prices rose by 15% and remained at 14% in Valencia and 13% in Malaga. With active demand, a growing number of households and dwindling supply, price pressures will continue to rise in 2024 in the most dynamic markets, while the rest are likely to see stabilisation or slight declines.
Demand to buy
Large cities remain an important source of demand, although this is shifting strongly to the suburbs. The impact of the rate hikes is proving to be less than expected. Previous demand was high, and although a portion has withdrawn, the remaining demand is still high enough to sustain rising prices.
Half of the transactions are closed without a mortgage. According to our data, more than half of the people looking to buy a property already have another property of their own, which makes the transaction easier and cheaper.
Property transactions
The year 2023 will close slightly below 600,000 transactions, representing a significant drop in transactions between 8% and 10%.
Even so, the sales figures for the first three quarters were high, 19% higher than in the first nine months of 2019 and the same as those sold in 2017. The step effect, due to the comparison with a year with as much activity as 2022, is responsible for the apparent contradiction between a very large fall and the fact that 2023 is, in terms of sales, one of the best years in the last 15 years.
In 2024, we are likely to see a business-as-usual scenario, as there is no forecast of a sudden emergence of large pockets of housing in the most in-demand areas. Even so, some of the demand that had been withdrawn in anticipation of a significant fall in prices that has not occurred may be activated in the coming year, which could increase market stress and push prices up more forcefully.
Mortgages
The number of mortgages signed has fallen significantly and is expected to close 2023 with a decline of more than 25% year-on-year, with prices continuing to rise to levels not seen since 2016.
Mixed mortgages (with initial fixed terms of three, five or ten years) have been this year's revelation and are likely to consolidate their position as the most widely used product during the first quarters of 2024. Despite the increase in financing costs, banks have not turned off the tap and continue to compete with each other to offer the most competitive mortgages for those who meet the required risk criteria.
In 2024, we do not expect this appetite to diminish, and we will see if the trend in rates even allows for some joy with price decreases or if, on the contrary, the economic situation forces banks to be more restrictive in their lending policy.
Euribor developments
The ECB's latest rate decisions have hindered predicting Euribor's behaviour in 12 months. Although there is a general trend already betting on lower rates, we do not expect this to happen in the short and medium term, and we could even see a new rise in the first part of the year.
In recent weeks, the index has experienced a pause in its rises and even a slight fall, but this does not necessarily mean we are facing a trend change. The market still has too many uncertainties that would not support an imminent index decline, such as inflation still at high levels, the geopolitical situation, the arrival of winter and its consequent increase in energy demand, salary increases or government measures to counteract the effect of inflation.
In the best-case scenario, we could see an easing in the second half of the year, so households with variable mortgages should plan their economies with the expectation that they will not see their mortgage repayments fall until 2025 at the earliest. If there is a drop, it will probably be minimal (no lower than 3%) unless Europe enters a stronger recession, affecting employment, and this does have a quicker effect on inflation, which would force the ECB to move quickly.
The rental market
Rent prices
Renting continues to be the main problem for Spanish families. The housing law passed in May, instead of alleviating or solving the problems that the market has been dragging along for four or five years after the progressive tightening of regulation, has had a negative effect: the bulky over-regulation has ended up reducing the rental market to levels not seen in the last decade.
This year, high prices have been compounded by the disappearance of much of the supply, which has increased anxiety among those looking for housing. At the end of November, renting a property was 9.2% more expensive than a year ago, reaching €11.9/m2. In the large markets, price rises are even more significant, reaching 21.6% in Valencia, 19.3% in Palma, 15.2% in Malaga, 14.4% in Barcelona and 12.4% in Madrid.
Rental offer
Similarly, the supply of permanent rental housing has fallen by 12% in the same period and continues to fall sharply in the main markets, dropping by 26% in Madrid, 23% in Malaga and 12% in Barcelona.
Short-term rentals
During the second half of the year, and following the approval of the Housing Law, seasonal rentals have made a strong appearance, becoming the favourite option of many owners who decided to take their properties off the market and who have returned them with this short-term option that does not fall under the umbrella of the Housing Law. At the end of the third quarter, this type of rental already accounted for 10% of the total supply in Spain and experienced a growth of 40% in the last year. This type of rental now accounts for 32% of all rentals in San Sebastian and 28% in Barcelona, while Madrid is still at 11% and 15% in Malaga.
Everything suggests that these percentages will grow in the last quarter of the year and that the weight of seasonal rentals will continue to increase in the large markets, which will further reduce the possibilities for households seeking to settle there, increasing prices and toughening landlords' requirements, who, with fewer homes on the market and more people looking for them, will focus on profiles that offer them more legal security and security against non-payment.
Profitability
Among the Spanish provincial capitals, Murcia and Lleida offer the highest returns for investors buying a property to put it on the rental market, with 8.3% and 8%, respectively, followed by Huelva, with 7.6%. With profitability above 7% are Jaen (7.3%) and Castellon (7%). On the other hand, San Sebastian is the city with the lowest profitability (3.8%), followed by Palma (4.5%), Pamplona and A Coruña (4.7% in both cities), Cadiz and Pontevedra also share the same percentage (4.8%). In Madrid, the profitability reaches 5.2%, and it is as high as 5.8% in Barcelona.
For 2024, profitability may increase in very dynamic markets such as Madrid or Barcelona due to the higher growth rates expected in the rental market compared to the property market. Conversely, profitability is likely to remain stable or even decrease slightly in other areas with less demand.
A vicious circle for tenants
In Spain, the rental effort is higher than that of buying. In order not to spend more than 30% of income on rent (maximum recommended amount), it is necessary to earn €31,550 net per year per family, while in the case of buying, the mortgage payment requires €21,561 net, although there is the barrier of having to pay 30% of the value of the home in advance. In other words, renting requires 46% more income but eliminates the need for prior savings.
Renters pay more than those who pay mortgages, making saving more difficult, preventing them from taking the plunge into home ownership. The best way to break this vicious circle is through a change in rental policies that would significantly increase the supply of rental housing, easing the pressure on rental housing and achieving a downward trend in prices that would increase families' ability to save for the down payment in the future.