House purchases increase while prices are rising: 5 indicators that could warn of a real estate bubble

Read the expert opinion of the Bank of Spain and real estate specialists
The Spanish property market is on the rise. Sales and purchases, with more than 50,000 transactions per month, are increasing while prices continue to rise. Is a new bubble approaching?
Benidorm, Spain
Benidorm, Spain
For the moment, there is a consensus among experts that the market is not immersed in a bubble as such, but the Bank of Spain warns in its latest Financial Stability Report of the importance to "closely monitor" the evolution of some indicators, "to discern whether they stabilise at their current values or, on the contrary, begin to grow to alert levels". The agency is monitoring four aspects: the evolution of supply, demand, prices and mortgages. At the international level, there is a concern that wealth continues to be deposited mainly in housing rather than in more productive sectors.

Supply and demand

Housing sales and purchases in Spain
Housing sales and purchases experienced a strong rebound in the first nine months of 2021, almost 8.5% compared to the same period in 2019 (when the market had not yet been paralysed by the pandemic), in contrast to the more contained evolution of supply.

This interest in buying is supported, in addition to the improvement in the general economic situation and comfortable financial conditions, by the materialisation of investment decisions that had been postponed before the outbreak of the pandemic.

However, the Bank of Spain stresses that "the supply of housing shows little dynamism and, if current trends continue, could be insufficient to cover increased demand in the coming years".

In other words, in the short term there could be tensions between housing supply and booming demand, which would have an impact on prices (the next indicator to be closely monitored).

In September, 53,410 transactions were closed, the highest figure in 14 years, according to data from the National Statistics Institute. Francisco Iñareta, spokesman for idealista, assures that "the statistics highlight the good moment the real estate sector is going through and how buyers' appetite grew at the end of the summer season, supported by low interest rates and the record savings of families". But he adds that "the data could indicate that recovery from the pandemic is about to culminate and we will soon see the variables begin to stabilize".

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The Bank of Spain explains in its report that "this upturn in purchases translated into an acceleration in average house prices in the second quarter, thus breaking their trend of deceleration since the beginning of 2019".

The greater dynamism of house prices, to register an increase of 3.3% year-on-year, occurred both in the new housing segment (6%) and, to a lesser extent, in the second-hand market (2.9%).

The price of new housing has recorded higher growth in recent years, which could be related to the greater capacity of this type of housing to adapt to the preferences of buyers and to the greater scarcity of supply in this segment compared to second-hand housing. The Bank of Spain warns that "the recent notable increase in the cost of construction materials could cause additional pressure on the price of new housing".

Even so, María Matos, Director of Research at Fotocasa, explains, after the record number of sales and purchases in September, that "the most important thing is that prices are not growing at the same rate [as transactions] and are being contained".

In any case, the Bank of Spain is closely monitoring the evolution of the sector and calculates that, at the moment, prices have already slightly exceeded the equilibrium level. The bank expects housing prices in Spain to rise by 5.4% in the 2021-2023 period, although it warns that, in an adverse scenario, prices could fall by up to 17%.

In any case, the market still seems to be far from a real estate bubble like the one we saw in 2007, as prices are 29% below the peak levels of that time, according to Tinsa.

Spanish real estate market forecast for 2022


In line with the greater dynamism of home sales and purchases, new mortgages rose sharply up to September 2021. Thus, the mortgage for house purchases was almost 26% higher than in the same period of 2019 (a year without a pandemic). Despite this, the outstanding balance of this type of financing has increased rather moderately, as repayments have also grown, possibly reflecting the use of savings accumulated by households at the beginning of the pandemic to accelerate the repayment of mortgage debt.

The agency explains that "this upturn in mortgage operations seems to respond mainly to demand factors, as there are no signs of a loosening of credit standards in recent months". However, it should be noted that in Spain most home purchases are paid for in cash: in September, only 47.7% were financed through a mortgage loan, according to the notaries.

In the opinion of Santiago Carbó, Professor of Economics at the University of Granada and Director of Financial Studies at Funcas, "there is no indicator that there could be a bubble and neither is there a disproportionate growth in financing for housing (which is rising by 0.7% year-on-year)".

The Bank of Spain concludes that "housing shows no signs of overvaluation and, although new mortgage lending is growing strongly in 2021, it is starting from very low levels; it is not translating into a material increase in the stock and there is no relaxation in the conditions for granting these loans". "If the real estate expansionary trend were to continue and intensify, however, it would be necessary to re-evaluate this diagnosis of risks," he said.

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International concern

Fears of a possible housing bubble are spreading to several countries, where alarm bells are ringing because real estate prices are inflated. A recent study by the McKinsey Global Institute claims that in Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, the UK and the US (these ten markets account for 60% of global value), real estate prices have tripled on average.

And it highlights that one of the main causes is that investors prefer to continue betting on the brick rather than other businesses more in line with the digital age. In fact, the report notes that two-thirds of net worth in these ten countries is stored in residential, corporate and government real estate assets, as well as land. This, together with rent inflation, creates a major problem in access to housing for younger people.

The analysis warns that the fact that the majority of wealth is allocated to real estate rather than to other areas such as infrastructure, industrial equipment, machinery and intangibles – which are the real drivers of productivity and innovation – leads to a growing disconnect between wealth and growth.

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