Does a real estate bubble risk exist for Spanish investors?

Does a real estate bubble risk exist for Spanish investors?

Price growth raises alarm

Home sales and purchases began growing again after lockdown and accelerated at the beginning of the year amid the recovery of the Spanish economy. Economic revival combined with pent-up demand accumulated during the most difficult months of the pandemic and record-level savings are pushing the housing market forward.

As a result, while only about 39,000 transactions were concluded per month in the first months of the year, in July their number exceeded 50,000. This figure became the maximum since 2008, and in August another record was set, unseen for 14 years (49,884 transactions), according to data from the National Institute of Statistics and notaries. In addition, prices for new and secondary housing continue to rise — in October they increased by 8.6% year-on-year, according to Tinsa. The general index of this appraiser has grown by 5.1% since the beginning of the COVID-19 pandemic.

Against this backdrop, fears are intensifying about Spain approaching another real estate bubble. In February 2021, the idea that “we are close to a real estate bubble” was rated at 5.7 points out of 10, and by September 2021 the average score had risen to 6.1, according to a housing market study for the second half of 2021 conducted by Fotocasa. Respondents link this trend mainly to high rental rates (53%) and purchase prices (48%).

“With the beginning of the pandemic, many Spaniards expected a sharp drop in prices, especially for home purchases, which did not happen. This may be one of the reasons why people believe we are close to a real estate bubble,” explains Maria Matos, Director of Research and Press Secretary of Fotocasa.

But are we really close to a bubble?

However, experts do not see a bubble threat. First, prices are not rising excessively, and now the average cost of secondary housing is almost 40% below the construction boom level. Second, although banks are issuing mortgage loans and keeping the “money tap” open, they are acting much more cautiously and restrainedly than before: financing in no case exceeds 90% of the mortgage amount, and banks are looking for borrowers with certain solvency.

In this sense, Tinsa confirms that the price dynamics for new and secondary housing remain 29% below the 2007 maximums.

Santiago Carbo, Professor of Economics at the University of Granada and Director of Financial Research at Funcas, believes: “There is no basis to assume that a real estate bubble may arise, especially of the scale from 15 years ago. There is a coincidence of three factors that create a certain impression among citizens. The first is a natural rise after the pandemic, which may be temporary. The sector is striving for normalization observed in the years before COVID. The second is that access to housing is becoming more difficult in a number of cities, and many transactions are made for investment purposes rather than for personal residence. This happens, among other things, because with negative interest rates, few profitable investment alternatives remain. The third is rent, the main alternative to purchase, which is becoming more expensive, making access to housing even more difficult and creating a sense of sharp price increases.”

“There is no indicator pointing to the possibility of a bubble, just as there is no disproportionate growth in housing credit (which is growing at 0.7% annually). However, the market will face problems due to shortages of materials and even labor, which will delay project delivery and lead to imbalances in the new housing segment,” the expert adds.

The Bank of Spain in its latest Financial Stability Report sees no alarming signals in the real estate market or signs of housing overvaluation, but warns that prices may rise even more due to the increased cost of labor and construction materials. The regulator believes that, unlike some European countries, the situation in Spain’s real estate market is not cause for concern and, although volumes of new mortgage lending are actively growing in 2021, no easing of lending conditions is observed.

For its part, Capital Economics, which conducted a study on the probability of a real estate bubble, places Spain outside the countries with the highest risk, leaving it at a moderate level in its rating. According to this company, New Zealand, Canada, Denmark, Australia, Sweden and Norway are the countries with the most overheated real estate markets. In New Zealand’s market, for example, average prices have risen by 22% since the end of 2019.

Commitment to the idea of property ownership remains deeply rooted

A fact confirmed by the Fotocasa report is that the preference for ownership over rental remains strong in Spain. Nine out of ten people over 18 years old, active in the housing market, positively or neutrally assess the idea that the sense of ownership remains deeply rooted in the Spanish mentality. The degree of agreement with this statement averages 7.6 points out of 10.

With such disposition toward housing ownership, people also support (7.2 points) the idea that at current rental rates, it is more profitable to pay a mortgage. This inclination toward buying and selling is reinforced when respondents are asked what the market trend is — more renting and less buying: six months ago 45% agreed with this, while now the share has decreased to 37%.

Only among youth aged 18 to 24 is rental evaluated positively — at 6.2 points, while Spaniards aged 45 to 75 give it 5.6 points.