House prices in Spain: how COVID-19 has affected the property market

15 June 2020, Redaction

The economic and real estate scenario that has been caused by the coronavirus pandemic in Spain is seemingly worsening as the weeks go by  according to experts. At the beginning of the period of confinement, the consensus of experts and agencies anticipated a decline in GDP of close to 5%, however, now the collapse is in the double digits. Banco de España (the Bank of Spain), Fedea (the Foundation of Applied Economics Studies) and the CEOE (the Spanish Confederation of Employers' Organisations) are already talking about falls of more than 10%.

A worsening economic outlook

The worsening economic situation is widespread and has also reached the housing market which was largely paralysed during the height of the pandemic, especially evident now that the first official data on the impact of the COVID-19 have been released. According to notaries, in March house sales plunged by 37% and mortgage signings by another 28%. These red numbers will continue tou rise, if we take into account that the state of alarm only affected the second half of the month of March. Along the same lines, registrars have put the drop in transactions during April at more than 38%. 

Due to this scenario, real estate experts and economists are updating their calculations and are currently predicting a double-digit drop in used housing prices, with particular emphasis on tourist areas; this comes in addition to a slowdown in the construction of new homes, and a timid adjustment of rental income, a market that will be reinforced by a new surge in demand.

Second hand properties

"We believe that second-hand housing prices may fall in the short term to between 5% and 10%," explains Mikel Echavarren, CEO of Colliers International Spain.

Raymond Torres, the director of Funcas (the Foundation of Savings Banks in Spain), goes one step further and recalls that "the dynamics of price and the economy are closely associated. According to this pattern, with an estimated fall in GDP of close to 9.5% according to the consensus, the average price could experience an even greater adjustment of between 10% and 20%". The Remax real estate network is also moving in those numbers, and warns that in some areas we could see a price drop of up to 30%.

According to Daniel Lacalle, the chief economist at the financial planning company Tressis, "it is logical to think that the price of housing will lose the increase that had accumulated between 2018 and 2019" and that there will be a double-digit drop in the price of housing due to the coronavirus.

New constructions

A very different situation is expected for new constructions that, for the moment, seem to be saved from the storm as far as prices are concerned. According to Daniel Cuervo, the secretary general of APCE España (the association of real estate promotors at national level), "the market is working very well. The sales already signed are being maintained with total normality, which is very important because we currently have the product that is under construction sold at approximately 85%. As for new sales, we are receiving positive information from companies, as there are reservations and sales, although at much lower rates than in a normal situation".

Echavarren from Colliers International also expects a limited impact on new residential construction and assures that "the price will remain reasonably stable both this year and in the coming years, provided that there are no significant variations if the subrogations of development loans are not put at risk by the banks".

The areas with the steepest drops

Regarding the areas where prices will fall the most, Lacalle puts the focus primarily on second home areas, beach locations and regions with higher unemployment, while Funcas also sees that sharp price drops are equally likely in areas of higher population density in major city centres (especially after confinement is increasing the interest in metropolitan areas or municipalities on the outskirts of large cities, where the buyer can opt for more spacious homes for the same price or even less). Moreover, such city centre homes, almost regardless of where they are located, have little natural light, and people want a change "because of the trauma that confinement has left," details Torres.

Along the same lines, José Luis Álvarez Arce, professor of Economics at the University of Navarra (UNAV), insists that "it is evident that the demand for housing is going to decrease hand in hand with the economic recession, increased unemployment and uncertainty about how health and economic events will evolve in the near future. This is compounded by the lower demand that can be expected from non-residents and expats, given the reduced mobility that we will encounter in the coming months. This will particularly affect housing in tourist areas.

Specifically, the fall in prices of second-hand housing could exceed 10% in Palma de Mallorca, Alicante, Barcelona, Valencia or the Canary Islands, according to the numbers handled by Colliers. 

Finally, the experts at APCE explain that the main impact will occur "in those areas with higher unemployment rates and destruction of business fabric, as is logical. In any case, we understand that those areas where real estate development activity was already present were locations with sufficient demand and markets with enough dynamism. On the contrary, those areas that do not have large cities and no second home market, places that had little activity before the health crisis, may have it more difficult".

How long will the price adjustment last?

For the moment, the forecast is that these lowering prices will continue this year until the start of 2021 at least, although everything will depend on how the health crisis evolves (with the possibility of more coronavirus outbreaks and the fact that a vaccine will take time to arrive), as well as how the economy responds in the coming months.

In this regard, Pedro Abella, director of the Executive Programme of Real Estate Management at IE Business School, says that "demand in the housing market remains strong, despite the stoppage, and supply is low, so it is expected that there will be a recovery between 9 and 12 months, provided that the evolution of the coronavirus continues downward and without resurgence. In addition, he believes that the fact that the economic and real estate situation is more solid than when the crisis broke out in 2008, "will mean that the impact in the short and medium term will not be very serious and that there will also be help from national and European institutions".

His theory is shared by Funcas' director, who rules out a prolonged collapse in the market because "several factors contribute to putting a floor in the recession: low interest rates, high potential demand especially among young people, demographic and sociological dynamics, international investors attracted by urban centers, whose prices are still lower than what is observed in other international capitals. However, he insists that although the market may start to rise in the autumn, provided there is no new pandemic requiring new containment measures, the collapse of property sales has not reached its lowest level, and "we will have to wait a while to recover the ground lost since the beginning of the state of alarm, because high unemployment and the fear of losing jobs will continue to have an effect on demand".

This opinion is also shared by the professor of economics at the University of Navarra, who stresses that "the decline will take some time, depending on how long it takes sellers to adjust their expectations of the sale price to the reality faced by potential buyers. But, as the real estate market was much more balanced than in the previous crisis, we can expect the adjustment to be much less dramatic. For APCE, the return to normality will take place in 18-20 months.

In general, the experts emphasise that the level of professionalisation of the real estate sector and the low level of debt of the companies of reference of the business are other factors that will help limit the impact of the COVID-19. They also stress that the foreseeable drop in new housing construction (which could reach 40%; that is, at levels of approximately four years ago), will reduce any risk of oversupply in the promotion of new construction.

In any case, the consensus believes that 2022 will be the first year in which the market returns to a situation similar to before COVID-19, although the experts at Collier believe that the 'full recovery' of the market could take between four and five years to arrive, "once our country reaches a similar level of occupation and unemployment to what we had at the beginning of the year," says Echavarren, who warns that only this year the decline in sales will be around 30%.

His view coincides with that of Gonzalo Bernardos, professor of Economics at the University of Barcelona (UB) and real estate analyst, who recalls that "the recovery of the housing market always lags behind that of the economy. The same thing happens with the fall in prices. In the first quarter of 2021, the price will continue to fall and, in contrast, the economy will already be growing at a high rate". In his opinion, we will not see last year's residential prices until the end of 2023. 

Remax predicts a drop in operations of between 10% and 30% year-on-year, depending on the geographic area, and a relatively quick recovery. "It seems that this is a much more seasonal crisis than the previous one in 2007, which will be less serious in terms of the real estate market and will last much less time," adds the real estate network.

A more moderate drop in rental prices

In general, the market believes that many potential buyers will be unable to access a home in terms of ownership, so they will be forced to turn to the rental market, which was already dragging an overdemand before the arrival of the coronavirus. Therefore, experts do not expect a significant drop in rent.

"It is clear that prices are going to have to go down, because those who are not in the process of an ERTE (temporary lay-off) have lost their jobs or are at risk of losing them. But demand will remain very high because renting a property will become the refuge of those who will not be able to buy, especially in large cities. We come from a clear lack of supply in the main economic and demographic centres and the demand will probably increase, so it is logical that there will not be strong falls in rent," says Beatriz Toribio, director general of ASVAL (the Association of Homeowners for Rental Properties).

Bernardos, for his part, believes that "there will be many more rental operations in 2020 than in 2019. On the one hand, there will be many reductions in the amount of rental prices. And, on the other hand, we could see the change of expensive rental housing for cheaper options, with the concentration in the same housing of former tenants who each lived in a different property..." Their numbers predict a drop in the price of rent of about 13%.

The same is true for the director of the Executive Programme for Real Estate Management at IE Business School, who emphasises that "the rental market began to have a lot of pull before the break, for reasons such as difficult access to financing due to strict conditions or lack of savings to pay a mortgage deposit, greater mobility among young people, due to changes in concepts such as collaborative economy or pay-per-use, and the increase of single-parent families by decision or divorce. These criteria have been maintained and even strengthened, and it is therefore foreseeable that they will continue with force, above all due to the extreme lack of supply (and in particular of affordable rent) and the possible tightening of financing conditions".

As the experts explain, one of the factors that will most affect the pull on rental demand is the foreseeable fall in mortgage signatures, as a result of the banks tightening up requirements when granting new loans for the purchase of homes in a scenario of increased risk of unemployment and a general fall in the purchasing power of citizens. Therefore, throughout the year, a decrease in the formalisation of new operations of around 30% is expected.

"Money is frightening and lending it even more so. Banks suffered a lot during the 'Great Recession' and many entities continue with the adjustments derived from it. These months of mortgage defaults must be resolved, but it is to be expected that the financial sector will be even more cautious, hence the potential of the rental housing market," stresses the IE Business School expert.

Bernardos believes that the granting of mortgages will fall even more than sales (30-35%), as a result of "a notably lower demand, since when there is a crisis, families tend to increase their savings in relation to their income, and a stricter criterion in the granting of mortgages. Families working in small and medium sized businesses and whose income is less than 2,500 euros will find it a lot more difficult to get a mortgage," he says.

Rent, the spearhead of recovery

The experts are sending a message to the Adminitration, asking it to take advantage of the opportunity that every crisis brings and to place rent as one of the spearheads of economic, employment and investment recovery.

"Renting, both on the free market and to the public at affordable prices, is a market that is not yet developed in Spain. That is why national and foreign investors are so interested in entering and opting for this model. And we should take advantage of this opportunity to continue the momentum that it seemed to be having before the arrival of the health crisis. In the end, it is a stronger and more flexible market than the purchase market, and it would be important to lay the foundations for when the recovery comes, which will come sooner or later, and for facing future crises," Toribio stresses.

In her opinion, the commitment to the rental market "would allow us to tackle several areas: on the one hand, the need to facilitate access to housing and, on the other, to generate economic activity, create jobs and attract new investment. But to do this, she considers it essential that there be a stable legal and regulatory framework that provides guarantees to investors, as well as reducing administrative obstacles, speeding up aid to those affected by the impact of the coronavirus and implementing tax incentives for both small and large homeowners to put their empty houses on the market.

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