Is there a danger of a real estate bubble for Spanish investors?

Sales and purchases began to rise again after the lockdown and, at the beginning of the year, they increased their pace as the Spanish economy accelerated. Thus, the economic recovery, together with the pent-up demand during the hardest months of the pandemic, and a record savings rate are pushing forward the housing market.

As a result, if in the first months of the year only around 39,000 transactions per month were closed, in July they exceeded 50,000. The figure marked a high since 2008, followed by another record in August not seen in 14 years (49,884 transactions), according to data from the National Statistics Institute and notaries. In addition, prices of new and used housing continue to rise – they increased by 8.6% year-on-year in October, as seen in data provided by Tinsa. In addition, the general index of this appraiser has increased by 5.1% since the beginning of the Covid-19 pandemic.

In this context, the concern of Spain approaching another real estate bubble is growing. In February 2021, the idea that "we are close to a real estate bubble" had a score of 5.7 out of 10, while in September 2021 it has risen to an average of 6.1, according to the study of the housing market in the second half of 2021 by Fotocasa. Individuals blame this trend mainly on high rental prices (53%) and purchase prices (48%).

"With the outbreak of the pandemic, many Spaniards expected prices, especially purchase prices, to fall drastically, which has not happened. This may be one of the reasons that make locals think that we are close to a real estate bubble," explains María Matos, Director of Studies and Spokesperson for Fotocasa.

However, experts do not perceive any danger of a bubble; firstly, because prices are not rising excessively and right now the average price of second-hand housing is almost 40% below the real estate boom years; secondly, although banks are giving mortgages and keeping the money tap open, they are being much more cautious and restrained than in the past; financing does not exceed 90% of the total mortgages in any case and they are looking for profiles with a certain solvency.

In this sense, Tinsa assures that the evolution of the prices of new and used housing was still 29% below the 2007 highs.

For Santiago Carbó, professor of Economics at the University of Granada and director of Financial Studies at Funcas, "there is no reason to consider that there could be a real estate bubble, much less of the magnitude we had 15 years ago. What is happening is that there is a confluence of three phenomena that generate some perception in this sense among citizens. The first is that there has been a logical upturn after the pandemic, but it may be temporary. The sector is tending towards the normalization observed in the years prior to Covid. The second is that access to housing is becoming more complicated in some cities and many of the transactions are more for investment matters than for use. This is happening, among other things, because there are few profitable investment alternatives in an environment of negative interest rates. Thirdly, the main alternative to buying – renting – is becoming more expensive, which further complicates access and generates the perception of sudden price rises."

"There is no indicator that there could be a bubble, nor is there a disproportionate growth in financing for housing (which is rising by 0.7% year-on-year); however, the market will face problems due to a lack of materials and even labor, which will delay deliveries and imply dysfunctions for new housing," adds the expert.

The Bank of Spain does not see any alarm signals in the real estate market or signs of overvaluation of housing in its latest Financial Stability Report, but warns that prices could rise further due to the increase in the cost of labor and construction materials. The supervisory body considers that, unlike what is happening in some European countries, in Spain the situation of the real estate market is not at a worrying stage and, although new mortgage credit is growing strongly in 2021, there is no relaxation in the conditions of concession.

For its part, Capital Economics, which has recently carried out a study on the possibilities of suffering a real estate bubble, places Spain outside the countries with the highest risk and leaves it in the temperate level of the list. For this firm, New Zealand, Canada, Denmark, Australia, Sweden and Norway are the nations with the hottest real estate markets. In the New Zealand market, for example, average prices are up 22% since the end of 2019.

What is a fact and is endorsed in the Fotocasa report is that ownership versus rental remains strong in Spain. Thus, nine out of ten individuals over the age of 18 active in the housing market rate positively or neutrally the idea that the feeling of ownership is still deeply rooted in the mentality of Spaniards. Their degree of agreement with this idea is, on average, 7.6 points out of 10.

With this good predisposition towards home ownership, they are also in favor (7.2 points) of the idea that the price of renting makes it worth paying more for a mortgage. This predisposition towards buying and selling amplifies when asked if the market trend is to rent more and buy less: six months ago, 45% were in favor of this idea and the percentage has now dropped to 37%.

Only among young people between 18 and 24 years of age renting is rated positively with 6.2 points, while Spaniards between 45 and 75 years of age give it a score of 5.6.