Spain's housing market cooling rapidly
Lalaine C. Delmendo | February 05, 2021
Spanish house prices rose slightly by 1.68% during the year to Q3 2020 (2.2% inflation-adjusted), a sharp slowdown from the previous year's 4.68% rise, according to the InstitutoNacional de Estadistica (INE). On a quarterly basis, house prices increased 1.15% in Q3 2020 (1.67% inflation-adjusted).
By property type:
- Existing dwellings: prices rose by a minuscule 0.76% during the year to Q3 2020 (1.27% inflation-adjusted), the slowest growth in six years.
- New dwellings: prices continue to rise strongly by 7.46% y-o-y in Q3 2020 (8.01% inflation-adjusted), slightly up from the annual rise of 6.64% in Q3 2019.
By autonomous regions, Melilla saw the biggest y-o-y price growth during the year to Q3 2020, at 4.87% (5.4% inflation-adjusted), followed by Ceuta (4.38%), Balears(3.35%), Murcia (3.04%), Asturias (2.72%), Aragón (2.5%), Castilla y León (2.23%), and Valencian Community (2.04%).
Minimal house price increases were seen in Galicia (1.92%), País Vasco (1.86%), Navarra (1.73%), Cataluña (1.73%), Canarias (1.43%), Castilla - La Mancha (1.38%), Cantabria (1.38%), Andalucía (1.25%), Madrid (1.21%), and La Rioja (1.19%). House prices were unchanged in Extremadura.
Spain's housing market only returned to growth in 2015, having fallen by 36.3% (-42.9% inflation-adjusted) from Q3 2007 to Q1 2015, with existing home prices falling by as much as 43.1% (-49% inflation-adjusted), based on figures from INE. There were 24 consecutive quarters of y-o-y declines.
House prices rose by an annual average of 2.5% (1.6% inflation-adjusted) from 2015 to 2019.
Demand is now falling sharply. Home sales in Spain fell sharply by 21.2% to 339,986 units in the first ten months of 2020 compared to the same period last year, after a modest annual decline of 2.4% in 2019, according to the InstitutoNacional de Estadistica (INE). The number of transactions for second-hand houses was down by 22.8% y-o-y while transactions for newly built houses dropped 14.3%. All of the autonomous regions saw falling demand.
Foreign demand, which buoyed the Spanish housing market in recent years, is also falling rapidly. In the first half of 2020, home sales to foreigners plummeted by 37% from a year earlier, according to the latest figures from the Association of Spanish Notaries.
There is one peculiarity that increases the risk of investing in Spanish property. Some residents are struggling with the okupa movement (short for ocupante). It stems from the notion that every person has a right to a home. Because of that, these “squatters” keep living in houses even though they can't pay for it.
In case a homeowner finds out about okupas on their property, they can apply one of two legal measures. The CEO of Virto Property, Sergei Sinyugin, notes that these are not quick but effective: to file a complaint in a civil law court or request a police investigation.
However, the okupas' effect on Costa Blanca property for sale is practically non-existent. At the very least, it doesn't compare to the influence of other external factors, such as construction activity and inflation.
Standard & Poor's projects a 1.4% decline in Spanish house prices by end-2020.
The COVID-19 pandemic has severely hurt Spain's already weakening economy. The Bank of Spain expects the economy to have contracted by 11.1% in 2020, and to rebound with 6.8% growth this year. The European Commission and the IMF released gloomier projections of contractions of 12.4% and 12.8%, respectively.
Foreigners have a right to buy and resell all kinds of property - residential, commercial or land, with no limits.
Gross rental yields in Spain have returned to normal
Gross rental yields on apartments in Barcelona´s Ciutat Vella - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - range from 4.00% to 5.15%. Similar yields, or maybe slightly lower, can also be had in Madrid. Not great, though not untypical for cities like Madrid and Barcelona. Yields on the very smallest apartments now offer reasonable returns. But then smaller apartments tend to need more maintenance, so a higher yield is justified.
Prices of apartments. Prices per square metre (sq. m.) of apartments in Barcelona range from around EUR 4,300 to EUR 6,000, or around EUR 225,000-300,000 for a 50 sq. m. apartment. In the heart of Madrid, i.e., Chamartín, Chamberí, Retiro and Salamanca, prices per sq. m. range from around EUR 4,700 to EUR 5,900, or around EUR 265,000 to 290,000 for a 50 sq. m. apartment. There´s very little price-difference between the two cities, and for all practical purposes costs are around the same.
In nearby upscale suburbs of Madrid such as Las Rozas, Majadahonda and Pozuelo de Alarcón, apartments are cheaper, with prices per sq. m. ranging from around EUR 3,100 to EUR 3,800.
Rents of apartments. Rents are similar in the two cities, maybe slightly lower in Madrid, so that 50 sq. m. apartments will cost around 950-1,100 euros per month, while 120 sq. m. apartments will cost around 1,750-2,500 euros a month.
Conclusion: All these yields figures are higher than last year, which was higher than the previous year. Spain is once again beginning to look a possible investment destination.
When buying property, take into consideration that round-trip transaction costs are moderate to high in Spain. See our Property transaction costs analysis in Spain and Residential property transaction costs in Spain, compared to the rest of Europe.
Taxes are high in Spain
Rental Income: All property owners are subject to a flat tax of 24% on gross rental income.
Property and Wealth: A special annual 3% tax is levied on the cadastral value of real estate owned by nonresidents.
Capital Gains: Capital gains tax realized by nonresidents are subject to flat rate of 19%.
Inheritance: Each beneficiary’s inheritance is taxed at progressive rates, from 7.65% to 34%, after certain tax-free amounts have been deducted.
Residents: Resident individuals are liable to tax on their worldwide income and assets at progressive rates, from 9.50% to 22.50%.
Total transaction costs are moderate in Spain
The total roundtrip transaction cost is around 9.50% to 15%. This includes the Property Transfer Tax, which varies from 6% to 10% depending on the autonomous region, and the real estate agent’s commission, which is around 2.5% to 3%.
For new properties, Value Added Tax, plus stamp duty, is imposed instead of property transfer tax.
Law and slow courts benefit tenants
Spain’s rental market is extremely pro-tenant.
Rent Control: The landlord and tenant have the contractual freedom to fix the rent and state the due date of payment. However, rent increases are tied to the Consumer Price Index and limited to once a year.
Tenant Security: The 1994 Urban Tenancy Act aimed to restore balance between the interest of landlords and tenants. It failed. Tenants are guaranteed tenure for five years. Courts are painfully slow in resolving cases of tenant eviction and compensation for rental arrears and damages.
Spanish economy struggling again, unemployment remains highIn January 23, 2014, Spain became the second euro zone country to exit its international bailout program, after Ireland. The Spanish economy has consistently outperformed much of Europe since. The economy grew by more than 3% annually from 2015 to 2018.
However, it has been a long, hard slog. Recession had been Spain’s normal condition for years, due to the global financial meltdown and the Eurozone debt crisis.
In 2019, economic growth slowed to 2%, as consumer demand waned and business investment weakened.
The COVID-19 pandemic has dramatically hurt Spain’s already weakening economy. The Bank of Spain expects the economy to have contracted by 11.1% in 2020, but to rebound with 6.8% growth this year. The European Commission and the IMF were more pessimistic, projecting 2020 contractions of 12.4% and 12.8%, respectively.
Spanish unemployment rose to 16.26% in Q3 2020, up from the previous year’s 13.92% but still lower than the annual average of about 22% from 2010 to 2017, according to INE.
Inflation is expected at -0.2% in 2020, from 0.8% in 2019, according to the European Commission.
Spain narrowed its budget deficit to around 2.9% of GDP in 2019, down from 2.5% in 2018, 3% in 2017, 4.3% in 2016, 5.2% in 2015, 6% in 2014, 7% in 2013 and 10.5% in 2012. However, the deficit is estimated to have risen dramatically again in 2020 to about 12.2% of GDP due to the pandemic, according to the European Commission. Spain’s gross public debt surged to 120.3% of GDP in 2020, up from 95.5% of GDP in 2019.
In November 2019, Spain’s governing Socialists, led by Prime Minister Pedro Sánchez, won the country’s fourth election in four years, but they remain short of a majority. In January 2020, Sánchez successfully formed a minority coalition government with the left-wing Podemos party. Sánchez had taken over as prime minister in June 2018, after his conservative predecessor Mariano Rajoy lost a parliamentary vote of confidence amidst a long-running corruption trial involving members of his Popular Party.