Risk of a housing bubble in Spain: buy now or wait?

After four months in a row in which property sales have exceeded those of 2008, and with prices rising and exceeding pre-pandemic levels, it is worth worrying about the risk of a new bubble. The perception is that there is already a boom in sales, which will continue to be felt in the evolution of prices, but will have nothing to do with the bursting of the last crisis. This rising market will particularly affect the large capitals.

Brick fever is back. Since June, more flats have been sold than at the height of the real estate boom, and this is pushing up prices, to the point that in some capitals they are exceeding pre-pandemic levels. If in September 2008 only 45,453 sales were closed, in the same month of this year there were 53,410 operations, which is 15% more, according to the National Institute of Statistics. Something similar has been happening in June, July and August, all surpassing the 2008 figures.

It is not that cranes have returned to populate the skyline of the cities, nor that banks have relaxed the conditions for granting mortgages to dangerous levels. However, it is now four months in a row that housing sales have exceeded those of 2008, and it was precisely then that the bubble burst. Given this picture, it is natural to ask: is there a risk of a new real estate bubble in Spain?

The short answer would be that it depends on who you ask and what indicators you consider. The general perception is that there is indeed a sales boom that is inflating prices, and this is something to keep an eye on, as the price will continue to rise. Especially because, unlike in the last crisis, there is not as much supply now as there was then, and a mismatch between low supply and high demand can lead to a spiral of price rises.

"The boom has already arrived," explains Gonzalo Bernardos, professor and director of the Master's in Real Estate at the University of Barcelona. However, he qualifies that the shock will only affect large capitals, that it will take two or three years to arrive, and that it will not be a financial crisis.

The difference with the previous crisis, in fact, is that now the financial risk is low, which limits the scope of a hypothetical boom.

It is true that there is a mortgage war going on, but it is being fought in the area of interest rates (at rock bottom) and not in the area of relaxing the lending conditions. In any case, there is no shortage of signs to be alert:

• There is a growing sense that the bubble is close. The idea that "we are close to a real estate bubble" is gaining prominence among Spaniards. At the beginning of the year, in February, the level of concern stood at 5.7 out of 10. Seven months later, this fear has risen to 6.1, according to Fotocasa. It is only a perception, but it is not without foundation. For María Matos, the portal's Director of Research, it is based on the fact that Spaniards are seeing how prices have continued to rise despite the pandemic, when everyone expected them to fall. And it is true that they are rising. By 3.3% in the second quarter, according to the Bank of Spain.
  
  

• A veiled warning from the Bank of Spain. Even so, the Bank of Spain states that "there is no clear evidence of market overheating". However, it does recognise that the price of housing is already above the pre-pandemic 2019 level, and exceeds (albeit by a little) its equilibrium levels. The agency's statements could be taken as a veiled warning, since, although it denies the accumulation of imbalances, it does warn that there are imbalances in prices. At the same time as it forecasts an acceleration in house prices, it warns that it will be necessary to be vigilant if they reach "alert levels".
  
  

• Four reasons why house prices will continue to rise. The pandemic has barely hit real estate, and the market has overheated at full speed, to the point that there are already 39 Spanish capitals where apartments are more expensive now than in 2019, according to Tinsa. However, these rises must be put into perspective, as even though sales have soared, prices are still far from the highs of the real estate boom. They are 29% lower than in 2007, according to Tinsa. This, however, is still a national average. The danger can be observed in specific capitals, where prices are closer to reaching their peak. In fact, the market will continue to tighten. The Bank of Spain names three reasons for it:

1. Firstly, because of the reactivation of demand: the demand that was pent up during 2021, a new demand for improvement born as a result of the lockdown and the return of foreign buyers. During the lockdown, a type of demand took off, spurred on by what Bernardos describes as the ice-cream effect: "People were buying apartments as if they were ice-cream". Now comes what he calls the ant effect: "It's the pent-up demand and the stragglers," he adds. This type of demand is driven by the perception that the economy is finally picking up, by savings rates at record highs and by the idea that housing is a safe haven investment for inflation that is taking off. They are joined by foreign investors and buyers, who in the first half of the year returned and increased their purchases by 47% compared to 2020, according to data from the Notaries.
2. he second reason for a future rise has to do with the notable increase in the cost of construction inputs, which could cause additional pressure on new construction, and this, in turn, could spill over to used housing.
3. The third has to do with the macro rehabilitation plan: the increase in activity derived from the amount of work to be carried out could provoke "additional tensions in labour costs and in the construction sector", warns the Bank of Spain.

There is a final reason, mentioned in this case by Bernardos, which has to do with supply. "If developers were building 300,000 homes a year, I would say that we are a long way from the bubble. My main concern is that, if we go upwards, next year developers will build at most 130,000 homes, and that is not enough to cover the existing demand", argues the expert. As there will be more buyers than supply, developers will raise prices. This will push part of the demand into second-hand housing, which in turn will push up the price of second-hand apartments. "The problem now is that with less credit, a bubble can probably be generated, but due to a shortage of supply," he adds.

• Mortgages at 18-year highs, but with low risk. Even if there were a bubble, one of the keys that could mitigate the bursting of the bubble has to do with the financial sector. It is true that lending is currently at an 18-year high, i.e. since 2003, according to the Bank of Spain, and that "mortgage lending is growing strongly". What is more, there is a real mortgage war being waged between institutions to attract customers. But the banks compete by offering low interest rates, and not by relaxing the conditions for granting mortgages. Without the financial risk, the consequences of the bubble would remain at an absolutely excessive price that demand does not cover, which would lead to a new fall in the market, with a price correction that would bring housing back to a level of sales that demand can absorb.
  

• Is it a good time to buy a house? It depends on the reasons for buying. You have to bear in mind that prices will continue to rise, but that they are already at high levels. The curious thing, says Bernardos, is that when a year ago prices experienced a certain adjustment, demand remained contained, while now it is soaring. "The more people buy, the more the idea of a bubble is spreading".
  

• How close is the bubble and where will it affect the most? In the absence of a crystal ball, if some indicators are taken into account, it is possible to predict that, unlike the previous bubble, this one will be a large-cap bubble, Bernardos explains. It is in these markets where prices are close to their peak and there is little supply. But the risk is not immediate, a forecast that coincides with the caution of the Bank of Spain, which considers that there would still have to be price rises to start worrying. The chief economist at Arcano Partners, Ignacio de la Torre, predicts that this risk "exists in the next five years". Bernardos agrees that, if there is a bubble, it will take at least until 2024