Risk of a Real Estate Bubble in Spain: Buy Now or Wait?
Risk of a Real Estate Bubble in Spain: Buy Now or Wait?
Growing sense of bubble proximity. The idea that “we are close to a real estate bubble” is becoming increasingly popular among Spaniards. At the beginning of the year, in February, the level of concern was 5.7 out of 10. Seven months later, this fear grew to 6.1, according to Fotocasa data. This is just perception, but it is not without basis. According to María Matos, research director of the portal, it is based on what Spaniards see as prices continue to rise despite the pandemic, when everyone expected them to fall. And they are indeed rising. By 3.3% in the second quarter, according to Bank of Spain data.
Veiled warning from the Bank of Spain. Nevertheless, the Bank of Spain states that “there is no clear evidence of market overheating.” However, it acknowledges that housing prices have already exceeded the pre-pandemic levels of 2019 and (although not by much) exceed equilibrium values. The agency’s statements can be interpreted as a veiled warning, since although it denies the accumulation of imbalances, it still warns about the presence of price distortions. Simultaneously with the forecast of accelerating housing price growth, the bank warns of the need to remain vigilant if they reach “alarming levels.”
Four reasons why housing prices will continue to rise. The pandemic barely affected the real estate sector, and the market overheated at full speed to such an extent that already in 39 Spanish provincial capitals, apartments cost more than in 2019, according to Tinsa data. However, this growth should be viewed in perspective: even with the sharp jump in sales, prices are still far from the real estate boom peaks. According to Tinsa, they are 29% lower than in 2007. However, this is a national average. The danger is observed in specific capitals where prices are close to their peak. In fact, the market will continue to tighten. The Bank of Spain names three reasons for this:
First, due to demand reactivation: pent-up demand accumulated throughout 2021, new demand for housing improvement arising from lockdowns, and the return of foreign buyers. During lockdown, the type of demand that Bernados describes as the “ice cream effect” sharply increased: “People were buying apartments as if they were ice cream.” Now comes what he calls the “ant effect”: “This is pent-up demand and those who have been thinking for a long time,” he adds. This type of demand is fueled by the feeling that the economy is finally recovering, record savings rates, and the idea that housing is a safe asset for investment amid rising inflation. They are joined by foreign investors and buyers who returned in the first half of the year and increased purchases by 47% compared to 2020, according to notary data.
The second reason for future growth is related to a notable increase in construction material costs, which may cause additional pressure on new construction prices, and this, in turn, may spill over to resale housing.
The third reason is related to the macro rehabilitation plan: increased activity caused by the volume of upcoming work may provoke “additional tension in labor costs and in the construction sector,” warns the Bank of Spain.
Mortgages at an 18-year high, but with low risk. Even if a bubble emerges, one of the key factors capable of mitigating its burst is the financial sector. It is true that lending is currently at an 18-year high, that is, since 2003, according to Bank of Spain data, and that “mortgage lending shows strong growth.” Moreover, there is a real mortgage war between institutions to attract clients. But banks compete by offering low interest rates, not by easing lending conditions. Without financial risk, the consequences of a bubble will be limited to an absolutely overpriced market that demand cannot cover, leading to a new market downturn with a price correction that will return housing to a sales level capable of absorbing demand.
Is now a good time to buy a house? It depends on the purchase objectives. It should be considered that prices will continue to rise, but they are already at high levels. Curiously, Bernados notes, when prices underwent a certain correction a year ago, demand remained restrained, while now it is rapidly growing. “The more people buy, the stronger the bubble idea spreads.”
How close is the bubble and where will it manifest most strongly? In the absence of a crystal ball, if we take into account some indicators, it can be predicted that, unlike the previous bubble, this will be a bubble in large cities, explains Bernados. It is precisely in these markets that prices are close to their peak and supply is limited. But the risk is not immediate - this forecast coincides with the caution of the Bank of Spain, which believes that prices must rise even more before starting to worry. Arcano Partners chief economist Ignacio de la Torre predicts that this risk “exists in the perspective of the next five years.” Bernados agrees that if a bubble does emerge, it will not happen before 2024.