The United Kingdom is experiencing a real estate crisis, but experts rule out a spillover effect in Spain

The UK housing market has seen better days. As in most countries, rising interest rates (now at 5.25%) have pushed up mortgage borrowing costs, causing the biggest fall in the UK's housing market in the past 14 years.

However, the struggle against inflation and the rising cost of money is not only seen in the British Isles, but Spain is also battling against the hikes made by the European Central Bank raising interest rates to 4.5%. In addition to monetary restrictions, like Great Britain, the Spanish real estate market also has high inflation, which has already considerably limited households' ability to save.

At the European level, inflation continues to affect households, increasingly reducing their savings capacity, which affects consumption and their home-buying capacity. In the UK, this has already generated worrying data in the real estate sector, with a drop in housing demand, worsening the rental stock situation.

The cost of renting a room has soared to over £1,000 per month, or around €1,170. This is partly due to the shortage of rental properties on the market, which has led to a 15% increase in the price of renting a room in the capital compared to a year ago.

High mortgage interest rates, which have reached 15-year highs, have dampened landlords' rental yields, and as a result, they are preferring to sell.

Experts do not expect a spillover effect

The result of these common factors between Spain and Great Britain on the British Isles could be a prediction of what could happen in Spain. In 2022, Spaniards lost 5.6 points of purchasing power, according to Spanish Ministry of Labour data, despite the highest wage increases. Inflation is, therefore, significantly impacting Spaniards' savings and, as a result, could limit demand, which peaked after the pandemic.

The loss of household purchasing power could lead to a market slowdown in transactions and reduced property values, says Ricardo Sousa, CEO of Century 21, especially those involving pre-owned homes.

Despite this, experts do not expect a spillover in the Spanish sector. In this regard, Luis Corral, CEO of Foro Consultores Inmobiliarios, stated that, although there could be downward pressure on prices in the second-hand housing market, as this depends on owners' situations, the specifications of the sector in Spain restrict all possibility of spillover and a repeat of the same situations as in the UK.

It is important to note that the British Isles have been showing a slowdown for several years, probably associated with the challenge of Brexit, as Jesús Duque, vice-president of Alfa Inmobiliaria, pointed out. Not surprisingly, this change has affected investor and foreign buyer confidence and implied changes in fiscal policies.

Continuous rate hikes and high inflation have hindered the situation, and reduced savings accrued by British families, aggravating the slowdown in the British economy. In Spain, Duque expects the European Central Bank's rate hike (currently at 4.5%) to weaken demand, even though the Spanish market has shown sustained growth over the last few years. However, this drop in demand is not expected to affect the total number of transactions, which are expected to be higher than in 2022.

Furthermore, Sousa pointed out that Spain has a pronounced homeownership culture, meaning that a considerable proportion of households own their homes, providing market stability. On the other hand, in other countries in the region, a higher percentage of people rent. It should be noted that Spain's strong homeownership culture has also meant that many households have already finished paying for their homes, which reduces the risk of evictions and non-payments if the economic situation worsens.

Marc Pritchard, Sales and Marketing Director of Taylor Wimpey Spain, said that although prices continue to rise, reaching a 7.2% year-on-year increase in August, according to idealista data, the rises are still more moderate than those seen in the UK.

However, it is worth noting the increase in sales by citizens with higher average incomes and higher education levels, who have been responsible for recovering demand in the sector. In this sense, Sousa highlighted the lack of supply in the affordable housing market, as the rise in interest rates reduces the number of transactions of this type by affecting what the average family could spend on a home.

Lack of stock: a problem that is not improving

The slowdown in the UK economy is precisely what, according to Duque, is causing house prices to fall, mainly caused by reduced household savings. It is also important to highlight the challenge of Brexit and the tax changes that have affected homeowners and investors. In the UK, these factors have led to a drop in the number of homes for sale, a problem also shared by Spain.

In Spain, new and second-hand housing stock seems limited, says Corral. The new-build market is very specific and characterised by long construction times, making the housing shortage particularly notable, leading buyers to move to the second-hand market. However, the reduced demand and transactions are keeping prices stable, a situation that is not expected to change for the time being.

The lack of new housing stock has been particularly notable in the aftermath of the pandemic despite being a problem the country had previously suffered from. Moreover, delays in construction and permit approvals during the pandemic only worsened the situation.

Pritchard highlighted the post-pandemic rise in demand for new flats on the outskirts of large cities, partly driven by the search for more affordable prices and sustainable, larger spaces with more communal areas suitable for convenient remote working. Buyers' preferences seem to have made the lack of homes meeting these characteristics more evident.

The British are the main foreign home buyers

Although the figures do not suggest that the sector will decline similarly to the UK's, much of the property market also depends on foreigners buying homes to live in Spain, especially in coastal areas. In this respect, the British top the list, followed by the French and Germans.

However, British households' delicate situation could lead to a decrease in these purchases, although everything seems to indicate that this will not be alarming.

For now, data from the property registrars shows that this is the direction in which they are heading. In the second quarter of the year, the British remained the main property buyers in Spain, with almost 2,000 transactions between April and June, but their relative weight decreased for the first time from 9% of the total to 8.8%.

Historically, they have been the most prominent foreign buyers and reached around 25% in 2015. However, since the end of 2020, when the reactivation of the residential market began after the pandemic's worst had passed, they barely exceeded 10% relative weight among foreign buyers. After the British (8.8%) – the most active buyers in spring – were Germans (7.25%), French (6.56%), Moroccans (5.37%), Italians (5.22%), Romanians (5.15%) and Belgians (5.09%).

With these figures on the table, the vice-president of Alfa Inmobiliaria likens the decline in property purchases by British buyers to what could happen with national buyers; so it would have a limited influence.

Not surprisingly, the Taylor Wimpey executive highlights Spain's appeal for this type of buyer, who are looking for a good climate and food, quality of life, nearness and good communications with their country of origin. These factors make it possible to attract buyers of any nationality.

Therefore, a decline in Brits' home buying could have a limited effect on the sector, thanks to the increase in interest from other countries. Luis Corral highlighted the growth of French, German and Dutch investors, but also that of citizens from countries close to Ukraine, who are increasingly investing in our country. Similarly, Sousa highlighted the North American investors, who seem increasingly attracted to Spain.

For Century 21's CEO, this data shows a diverse property market, which makes it much more resilient in the face of economic changes in any one country. Real estate sector diversification and Spain's increasing popularity, which is also growing in popularity with investors, seem able to offset any potential downturn in data from the UK.

Therefore, the Spanish market has shown its growing attractiveness and diversification, making it more resilient in the face of possible adversity in historically important countries for the sector, such as the UK.