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Spain’s house price rises are slowing down, but the forecast remains optimistic
Spanish house prices rose by 4.68 percent during the year to Q3 2019 (4.36 percent inflation-adjusted), a decline from the previous year’s 7.16 percent rise, according to the Instituto Nacional de Estadistica (INE). On a quarterly basis, house prices rose by 1.58 percent in Q3 2019 (2.26 percent inflation-adjusted).
By type of property:
- Existing dwellings: Rates increased by 4.41 percent throughout the year to Q3 2019 (4.08 percent inflation-adjusted), the slowest rise in three years.
- New dwellings: Rates increased by 6.64 percent y-o-y in Q3 2019 (6.31 percent inflation-adjusted), after annual rises of 7.17 percent in Q2 2019, 10.35 percent in Q1 2019, 8.03 percent in Q4 2018 and 6.13 percent in Q3 2018.
The Bank of Spain records lower house prices. In the year to Q3 2019, domestic house prices rose modestly by 3.07 percent (2.75 percent inflation-adjusted). On a quarterly basis, house prices rose by a minuscule 0.05 percent in Q3 2019 (0.73 percent inflation-adjusted).
After seven long years of downturn in house prices, the Spanish housing sector finally returned to development in 2015. Spanish house prices dropped by a total of 36.3 percent (-42.9 percent inflation-adjusted) from Q3 2007 to Q1 2015, with current home prices falling by as much as 43.1 percent (-49 percent inflation-adjusted) on the basis of INE figures. There have been 24 successive periods of y-o-y falls.
Demand is slowly going down. Home sales in Spain declined, according to the Instituto Nacional de Estadistica (INE). The number of transactions for second-hand houses decreased by 4 percent but increased slightly by 1.3 percent for newly built houses.
The rise in home sales in recent years has been driven mainly by foreigners buying homes on the coast and in cities like Barcelona and the Costa del Sol, one of the country’s most popular areas with foreign buyers. The bulk of international homebuyers are British, French, German, Belgian, Italian and Swedish.
Construction activity is weakening again, having hit a seven-year peak in 2018. During the first seven months of 2019, the number and area of residential construction permits declined.
Foreclosures rose by 11 percent in the first three quarters of 2019 from the same timeframe in the previous year to 21,039 households, based on INE estimates. Foreclosures for new housing rose by 36.9 percent and for existing residences by 4.4 percent.
Despite sluggish economic growth, the outlook for Spain’s property market remains up, with house prices projected to rise by 5.5 percent in 2020, the highest gain among eight European countries listed in Moody’s latest prediction. According to Moody, the Spanish housing sector is now facing low risks due to tight mortgage lending requirements and an surge in the number of fixed-rate mortgages. In October 2019, fixed-rate mortgages accounted for 45.3 percent of all new loans signed, according to INE.
In 2019, the economy contracted by 2%, a decrease from the previous year’s 2.4% expansion and the slowest expansion since 2014. The Bank of Spain expects economic growth to slow down further to 1.7% this year and 1.6% in 2021. Nevertheless, the European Commission is even more negative, forecasting that the Spanish economy will grow by just 1.5 percent this year and by 1.4 percent next year.
Foreigners have the right to buy and resell all kinds of properties, whether residential, commercial or land, without restriction.
Gross rental returns in Spain returned to regular levels
Gross rental returns for apartments in Barcelona’s Ciutat Vella – the return received on the selling price of a rented property before VAT, vacancy and other costs -range from 4.00 percent to 5.15 per cent. Similar yields, or perhaps slightly lower yields, can also occur in Madrid. Not nice, but not uncommon for cities like Madrid and Barcelona. Yields for the very smallest apartments now give a good return. But smaller apartments tend to require more upkeep, so higher yields are justified.
Apartment rates. Prices per square meter (sq. m.) of apartments in Barcelona range from around EUR 4.300 to EUR 6.000, or around EUR 225,000 to EUR 300,000 for a 50 square meter apartment In the heart of Madrid, i.e. Chamartín, Chamberí, Retiro and Salamanca, rates per sq. m. This ranges from around EUR 4,700 to EUR 5,900, or around EUR 265,000 to 290,000 for a 50 square meters apartment. There is a very little price gap between the two towns, and for all practical purposes the rate is exactly the same.
Apartments are cheaper in the surrounding high-rise neighborhoods of Madrid, such as Las Rozas, Majadahonda and Pozuelo de Alarcón, with costs per sq. m. ranging from around EUR 3.100 to EUR 3.800.
Apartment rentals. Rents are close in both countries, maybe marginally lower in Madrid, so 50 sq. m. apartments would cost about EUR 950-1,100 a month, relative to EUR 120 sq. m. apartments that would cost about 1,750-2,500 euros a month.
Conclusion: All of these numbers are higher than in the prior year, which was higher than in the prior year. Spain is once again beginning to look like a potential investment destination.
When purchasing land, take into account that the cost of roundtrip transactions in Spain is moderate to high.
Total transaction costs are moderate.
Overall roundtrip transaction costs range between 9.50 and 15 percent. That includes the Property Transfer Tax, which ranges from 6% to 10% depending on the autonomous zone, and the commission for the real estate agent, which is about 2.5% to 3%.
In the case of new properties, value added tax plus stamp duty is levied instead of property transfer tax.
Landlord and Tenant
Law and slow courts benefit tenants
Spain’s rental market is highly pro-tenant.
Rent Control: The landlord and the tenant have the mutual right to set the rate and to specify the due date of payment. However, the rise in rent is related to the Consumer Price Index and restricted to once a year.
Tenant Security: The aim of the 1994 Urban Tenancy Act was to restore the balance between the rights of landlords and tenants. It crashed. Tenants are given a term of five years. Courts are painfully slow in settling issues of eviction of renters and restitution for rental arrears and losses.
Spanish economy is declining, but unemployment is decreasing
The Spanish economy has significantly outperformed all of Europe since 2014. It was a long, rough climb, though. Recession has been the natural state of Spain for years, largely due to the adverse effects of the global financial crash and the eurozone debt crisis. Economic growth declined to 2% in 2019, with market demand weakening and corporate spending reduced.
The Bank of Spain expects economic growth to slow down further this year and in 2021. The European Commission is also more negative, forecasting that the Spanish economy will expand by just 1.5 percent this year and by 1.4 percent next year.
Spanish unemployment dropped to 13.92 percent in Q3 2019 , down from 14.55 percent in the previous year and from an estimated peak of 22 percent between 2010 and 2017, according to INE. Despite this, Spain’s unemployment ranks the second largest in the OECD, behind Greece. The total number of unemployed people is 3.1 million.
Inflation is forecast to stay small at 1.1% this year, according to the European Commission.
Spain lowered the budget deficit to about 2.3 percent of GDP in 2019, down from 2.5 per cent in 2018. According to the European Commission, the deficit is expected to fall further to 2.2% of GDP this year. Spain’s total public debt was unremarkable at 96.7% of GDP in 2019.