The impact of COVID-19 on the Spanish real estate sector explained in 7 steps

If you're thinking of buying or selling a property in Spain, it's time to find out about the "new normal" for the real estate sector.

Photo by Luke Stackpoole on Unsplash
Photo by Luke Stackpoole on Unsplash
12 May 2020, Redaction

With their eyes already set on what is being called the "new normal", real estate agents in Spain are beginning to wonder what the consequences and recovery will look like and what the keys to a successful come back are that they must carry out in the wake of the coronavirus crisis. Raf Jacob, an economist specialising in finance and member of the Board of Directors of the Spanish Association of Personal Shoppers in Real Estate ("Junta Directiva de la Asociación Española de Personal Shopper Inmobiliario") and professor at the University of Barcelona in the Real Estate Masters course, has given his opinion of the situation in an article on what the impact of COVID-19 will be on the real estate market in Spain and in particular, in Barcelona, and what the 7 keys to its subsequent recovery will be, even including some positive consequences that could come out of the crisis. Jacob is also CEO of Inspire Boutique Apartments.

A crisis, but very different from the financial and real estate crisis of 2008

Many people quickly assume, and publish corresponding statements on social networks, that COVID-19 will cause the same effects on housing as the crisis we experienced 12 years ago. Those people basically remember that property prices in Spain fell by about 40%. That was due to the housing bubble. Today both the real estate and the financial markets are healthier, the debt situation of owners is better, because there are savings, and interest rates are historically low.

There is no reason to expect a similar drop in prices as a result of the coronavirus. But the economy is de facto at a standstill, an economic recession is looming, and perhaps even a possible period of deflation. The housing market depends directly on the health of the economy.

In his report, Jacob also states that comparing both crises in terms of their impact on housing prices is a mistake that can lead to wrong decisions that buyers might regret for years. Here's why.

What to expect from the housing market in 2020

Will the prices go down? Of course they will! And there will be fewer transactions, fewer buyers and fewer sellers. Sellers will suffer more than buyers and coastal areas, especially second homes, will face the most difficult times. The main locations in the big cities will attract the interest of buyers.

Many real estate agencies will disappear due to lack of business, those that give little or bad service, first. There is however an opportunity for those buyers who look beyond the current crisis and are not influenced by fear. Jacob belives that younger investors are the candidates to take advantage of this new situation where buyers and sellers will have to adapt.

Forget your benchmarks

In a period of just a few days, real estate buying and selling activity has fallen to almost 0%. We can expect this activity to resume shortly after the coronavirus situation improves, but by then things will be rather different.

Let's say that in January a potential buyer or seller had a wide knowledge of the real estate market and prices in cities like Barcelona. However, in the current climate those references could lead to a very bad decision (or at least one that is less than ideal) in June. Understanding the new situation and adapting your strategy to it is crucial. That is why you should forget your benchmarks and reference points according to Jacob.

The impact will be harder for sellers than for buyers

Some sellers will wait to see if they can sell, and other sellers will simply pull their home from the market if they have no need or urgency to sell. This will reduce the volume of transactions, because there won't be as much product on the market.

But the reality will be that the economic downturn and uncertainty will prompt many homeowners to sell and they will have to adjust their price expectations. While a buyer or investor may wait, individuals, families, entrepreneurs or investors who need money in the short term for personal or business reasons will be forced to sell non-core assets and will not be able to wait. They will first sell their second home, if they have one, or apartments that are rented, as both are non-essential.

With fewer buyers in the market and a larger portion of opportunity-craving buyers, sellers will also have to adjust their sales prices. The problem is that most homeowners think their home is much better and worth more than their neighbour's or friend's, while in fact it's neither worth more nor better.

If you need to sell, face the reality and limit your exposure to the downturns, because you can lose your chance to sell and you probably won't get a second chance like this in the near future. Jacob also points out that if you're not clear on this, seek professional advice.

Trapped investors who need a 'plan B

The main cities of the country have a great number of investors (families, businessmen, and foreigners amongst others) that in the last years have speculated with too much confidence in the purchase, reform and sale of houses. They currently own one or more properties and cannot find a way out of the market.

If you find yourself in this situation, abandon your plan A and move on to a plan B or C. Jacob addes that he has similar conversations every day and understands how worried these investors are. "I have to warn you that the business case will not be fulfilled this year. In addition, the fixed and variable costs will eat up profit month by month." If this is your case, Jacob's advice is that selling today, even at a lower or negative margin, may be better than waiting until later this year and he recommends being creative. Talk to your bank, renegotiate the financing terms or try renting the house in the meantime. But above all, don't stick to your plan A if you need to sell this year.

The coronavirus will create opportunities for solvent buyers or investors

Solvency does not mean having a large amount of money in the bank account. It means having a stable job plus some savings and therefore access to a mortgage. Of course, in Barcelona and other Spanish cities there are many people who belong to this group.

Jacob notes that investment buyers are getting younger. Young people buy more easily during and just after a crisis than older investors. They have no loss references, they see the opportunity more, they are well informed and/or advised.

If you are solvent, you can get a rate of interest never seen before, and here we are talking about historical minimum rates. You can get a fixed rate mortgage for 10, 20 or even 30 years (for younger investors). You will therefore create wealth, using bank financial leverage at an almost irrelevant cost.

These solvent buyers will be able to buy, investing very little equity (50,000 euros-100,000 euros), and buy a flat in an excellent area which will give them peace of mind, positive monthly cash flows and returns that can exceed 10% on their invested equity. These buyers will also have bought at a discount, which increases the chances of revaluation.

And they will have bought in emblematic areas of Barcelona and other large cities in Spain. In Barcelona, for example, more buyers will be seen in the city centre and in the upper area, an area which, until now, was prohibitive. There will be buying opportunities in the Eixample, Sant Gervasi, Borne and Gracia districts amonst others. It is important to emphasise that the opportunities not only depend on the area, but also the personal situation of the owner and the need to sell is a key factor.

There will be opportunities and even some bargains, but they will not continue forever and perhaps not even in 2021.

To conclude his point, Jacob states: "I doubt that people with a need to sell will lower their prices publicly on online platforms. They will do so privately. They will have to fight for significant discounts in a negotiation, with a good strategy. But before that you have to find those flats, of course."

How can COVID-19 impact real estate prices?

Prices will probably vary little initially, over the next few weeks, but then the difference between the prices requested by the sellers and the closing price will decrease, and house prices will drop, slightly or more significantly, depending on the characteristics of the apartment, the area and the urgency of the seller.

For Barcelona a price decrease in the range of 7% to 8% is possible. Madrid could fall a little more and Spain on average could adjust around 10% downwards during the course of this year. For holiday homes in coastal areas, the problem may be very different, and we could see a situation where the housing supply and demand curves will struggle to cross, meaning that many transactions will simply not materialise.

How long will it last? The impact will be higher in the short term and if the necessary financial and fiscal stimuli are implemented from Spain and Europe, we will see a positive growth curve in 2021. In terms of real estate, that's a short amout of time. For example, if you are thinking of buying: when you have decided how to act, and you have found the property and completed the purchase, June or September will have arrived.

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