Spanish Property Market Forecast 2019: House Prices in Spain - Investment Analysis

The previous year, as foreseen by real estate specialists, has been a period of strengthening of the sector. The year 2019, as many advocates and professionals predict, will be both a period of maturity of the market and stabilization of prices.

The type of companies that we can find in the real estate market differ. On one hand we have the investors, mainly comprised of international companies. On the other hand, national companies are the ones that are mainly dedicated to the construction process.

The national recovery of prices from crisis minimums reached 13.8%. Capitals and large cities were above average, having revalued by 23% from minimums, followed by the Balearic and Canary Islands with 18.4%. The Mediterranean peninsular coast registered an accumulated increase of 13.6%, in line with the general index, and metropolitan areas by 12%. In the rest of the territory, the cumulative increase from minimums barely exceeded 5%.

Large cities and metropolitan areas played a large part in the annual increase with 7.2% and 4%, respectively, while in the rest of the national territory the appreciation was much more discreet.

Everything points to 2019 being the year in which the sector will show the maturity of the new cycle, with both prices and sales continuing to rise. The main challenge is to adjust the supply to the housing demand.

2018 was a record high for the Spanish real estate market in terms of overseas purchases. Official statistics from the Board of Registrars shows that in 2018, foreigners bought 65,500 houses and flats in Spain. According to this report, these foreign buyers accounted for 12.6% of the total volume of transactions.

Spain has always attracted foreign investors in terms of tourism, so the Mediterranean coast and the Balearic and Canary Islands remain the most popular destinations for purchase. The most attractive province to foreigners is Alicante. There, in the fourth quarter of 2018, foreigners bought 41.28% of all real estate sold, due to the best price-to-quality correlation and the warmest climate and sea.

With regard to second homes, according to the Real Estate Index of Fotocasa, 2018 ended with an average annual price increase of 7.8%, the highest level since 2006 closed with an increase of 7.7%. The price behaviour remains very uneven and in 2018, the differences between territories have been noticeably marked, with the Community of Madrid, Catalonia and the islands leading the increase. With interannual ranging between 10% in Catalonia and 19.5% in Madrid, these increases contrast with the moderate tendencies of the rest of the country.

The Director of Studies of Fotocasa highlights that, "although these upturns are nearly similar to those of the peak years, the average price of secondary housing is still 36.7% lesser than the top of those years and is on the 2013 levels. Thus, the financial control and the stabilization of the sector helps to put a real estate bubble at a distance".

Demand for residential properties will continue to increase over the following years and, despite the fact that the sector reacts ahead of schedule.

The financial year of 2018 ended with around 100,000 new construction permissions, about 25% more than in 2016. While it is an important increase, the levels here are still relatively low and the permissions in 2018 account for 13% of the ones assigned between 2004 and 2006.

Let's take a look at the forecasts from industry professionals in the Spanish real estate market:

The shortage of land has been an issue already for many years in Spain. Mainly in Madrid, Barcelona, Andalusia and the Basque Country, where there is a high demand for land.

Almost half of all property in Spain (45.5%) is bought with a mortgage, according to the General Council of Notaries of Spain. Only in the other 55.5% of cases does the buyer have the entire amount on hand to complete the deal. Loans for housing are most often taken in Madrid, Navarra and the Basque Country. Experts emphasize: the country's mortgage market is at its peak. In 2018, Spaniards took out 266,300 mortgages, with an average loan amount of €138,713.

In the coming years, several large office complexes of up to 37,000 m² will be opened in the Catalan capital. Specialists are sure that this is one of the most profitable areas for investment in Spain at the current moment. According to experts, today 54% of all commercial space is concentrated in two business areas: 22@ and Fira de Barcelona. Large international corporations, such as Yahoo and Microsoft, have their representative offices in these quarters.

According to Savills Aguirre Newman's forecast, in 2019 over a billion euros will be invested in the offices of Barcelona. This figure is one and a half times greater than last year (€635 million).

Madrid ranked third in the world in terms of investment in luxury real estate, according to the Barnes Cities Index rating. This is a large increase from last year, when the Spanish capital was ranked tenth. In drawing up the list, not only was the financial component taken into account, but other factors affecting the life of the buyer in a particular locality are also considered: economic and political stability, transport accessibility, level of taxation, quality of local education, etc.

Barcelona, although not included in the top 10 of the above list, offers buyers a lot of luxury real estate. And here it is not just about expensive units, there is housing for sale in iconic buildings in historic areas, like in Paseo de Gracia, one of the most recognizable avenues of the Catalan capital.

This building is part of the neoclassical tradition of the area, and is located opposite the Barcelona Stock Exchange and two blocks from Casa Batlló (one of Antonio Gaudi's masterpieces). On five floors there are 21 four-room flats, and on the roof of the house there is a spacious terrace with a breath-taking view of the city. The exact price of this exclusive real estate is still kept secret, but according to experts it would be at least €15,000 per square metre.

One of the main indicators used to evaluate the condition of the real estate sector is the price of housing. By 2019, according to the experts, this parameter will continue to rise but in a rather moderate way.

At the end of 2018, all the forecasts seemed to indicate that the increase will be between 4% and 6%. The appraiser Tinsa predicted an increase in prices around 5%.

In March, the National Institute of Statistics (INE) issued the latest analytics on the Spanish housing market. It stated that at the beginning of 2019, there was a rapid growth in sales of new housing. In January 2019, 9,259 new homes and flats were sold – the highest figure in five years and 11.2% more than in January 2018. At the same time, experts note that the overwhelming majority of transactions (80.6%) still happen on the secondary market.

In total, 47,645 property units were purchased in January 2019 (40% more than in December 2018). The most noticeable growth was registered in Extremadura, Galicia and Aragon. One of the hottest housing markets in 2019 remains the Costa Blanca, popular among the British and famous for its affordable prices.

In the first quarter of 2019, Spanish real estate went up by 4.9% (compared to the first quarter of 2018), according to the Tinsa analytics. They report that houses and flats in Spain gained in price for the tenth quarter in a row. As for April 2019, the cost per square metre of housing in Spain is estimated at €1,349.

What's more, prices in Madrid and Barcelona have slowed down, with Burgos, Valladolid, Malaga, Zaragoza, Valencia, Tarragona and Palma de Mallorca taking the lead in this matter. In 15 out of 50 provinces, the average cost per square metre in the first quarter decreased; this led to Zamora, Lugo, Albacete and Soria losing the most in price.

The rising demand for property is highly evident in Barcelona, Costa del Sol, Valencia, Balearic Islands and, of course, Madrid. It is in the latter where the best sales figures of all Spain and rising inertia in the prices of land are recorded, making the price of a finished house far exceed the €2,000 per m², and the price of rental housing reaching €20 per m².

The director of Strategy, Development and Consulting of Solvia, Guillermo Estévez, is sure that the concession agreement in 2017 and 2018 will enhance the amount of new properties available for purchase in the short and medium run, whereas in the rental market the raise in demand and shortage of supply has resulted in higher prices. He suggested that this rise of rental cost, "has a clear ceiling". This ceiling will be reached when the rent will no longer be affordable for families.

In the case of any kind of market regulation, the CEO of Anticipa Real Estate, Eduard Mendiluce, believes that it may have a reverse impact, such as a decrease in the supply of rental accommodation. He points out that market performance shows that development is uneven; in some region prices are decreasing, which reinforces the need to be careful with the policies that are going to be introduced.

To summarise, one of the key reasons why the sale of property has undergone a significant growth in 2018 was the increase in the price of rentals. Accordingly, the demand also went up and customers of all ages started to consider the option to rent to be an irrelevant spending and went for a purchase as the perfect potential long-term asset.

The Spanish real estate sector will continue on expanding and developing this year, albeit not so rapidly, as reported by several specialists in the field. Last year the Spanish property market obtained good rates in terms of sales transactions, although most of them had been made on resale homes.

What can we expect in the near future?

In this regard, Estévez (Solvia) has concluded that the positive trend, recorded in 2018, will not only be continued this year, but will increase by 5%. He assumed that the growth in cost of housing will also begin to slow down in 2019, with growth no more than 4%, after going up by 6.1% in the previous year. Overall, the property market will have more possibilities in growth from the number of transactions rather than from prices.

Mendiluce (Anticipa), has estimated that the market, "has been expanding for some years now," and that this tendency will remain for the current year. Following Anticipa research, expectations for 2019 point to close to 587,000 units sold, which is 5.4% more than the previous year.

A real estate bubble? Experts deny that the market is heading towards one. For Mendiluce (Anticipa), an increase in price is the case only in some cities, metropolitan zones, tourist areas or places with a big gap between demand and supply.

Estévez (Solvia) believes that conversations about bubbles start when speculations combine with an "unusual" rise in prices, which differ from the actual values of the properties.

Mendiluce (Anticipa) has pointed at the lack of existing land available for construction.

This current period is characterised by a protagonist who was not that active earlier: the customer. The client will start to strongly influence innovation and sustainability, which various developers are already working on, specifically in covering (even more) the needs of the prospective proprietors.

The divorce process between the United Kingdom and the European Union seemed it would be an element of distortion, if not a brake, in terms of sales of homes to British customers; especially considering that the United Kingdom is the main customer of the Spanish real estate sector. But it has not been that way.

British sales fell by 3.6% in 2016 compared to 2015, but since then they have continued to grow – in price too. The British now pay even more for their houses than before. The average rate for real estate purchased in Alicante now reached 139,000 euros, while in 2015 the average price was 129,000 euros per property.

However, the weight of British customers in total sales has slowed down. And after winning the YES to Brexit vote in June 2016, local promoters intensified their diversification actions to look for more clients in other countries with the aim of reducing their exposure to British buyers. For example, in 2015, 23.5% of all homes sold to foreign investors in the Valencian Community were acquired by British buyers. In 2018, residents of the United Kingdom accounted for 17.3% of all sales to foreigners, and 21.3% (675 million euros) of total sales revenue.