Spanish housing market is now healthy
March 17, 2018
Spain's housing market finally returned to growth in Q1 2016. Spanish house prices had fallen by a total of 41.9% (46.8% inflation-adjusted) from Q4 2007 to Q3 2015, based on figures from TINSA. There were 31 consecutive quarters of y-o-y declines:
- In 2008, Spanish house prices fell 8.75% (-10.05% inflation-adjusted)
- In 2009, house prices fell 6.57% (-7.23% inflation-adjusted)
- In 2010, house prices fell 3.85% (-6.67% inflation-adjusted)
- In 2011, house prices fell 8.17% (-10.28% inflation-adjusted)
- In 2012, house prices fell 11.34% (-13.82% inflation-adjusted)
- In 2013, house prices fell 9.19% (-9.44% inflation-adjusted)
- In 2014, house prices fell 2.96% (-1.96% inflation-adjusted)
- In 2015, house prices fell 1.71% (-1.71% inflation-adjusted)
- In 2016, house prices increased slightly by 1.67% (0.1% inflation-adjusted)
- In 2017, the housing market recorded the highest growth in a decade, with prices rising by 4.47% (3.32% inflation-adjusted)
Demand continues to rise strongly. In 2017, the total number of home sales in Spain increased 14.6% to 464,423 units from the previous year, according to the Instituto Nacional de Estadistica (INE). This rise in transactions was mainly driven by foreigners buying homes on the coast and in cities like Barcelona and on the Costa del Sol, one of the country's most popular areas with overseas purchasers. Most foreign homebuyers are Britons, French, Germans, Belgians, Italians and Swedes.
Foreclosures fell by 34.2% to just 27,171 dwellings in 2017 from a year earlier, based on figures from the INE. Foreclosures dropped 13.3% for new dwellings and by 37.3% for existing dwellings.
The outlook for Spain's housing market remains upbeat, with house sales expected to rise by between 10% and 15% to reach about 550,000 transactions this year, according to TINSA.
Nationwide house prices are also projected to rise by 6.1% this year from a year earlier -the fifth consecutive year of growth, according to the Instituto de Práctica Empresarial (IPE). All Spanish autonomous regions will experience house price rises in 2018, with Madrid registering the highest increase of 10.8%, followed by Castilla y León (8%) and the Canaries (7.7%). Catalonia's house price growth will slow to 4.9%, mainly due to political tensions.
The Spanish economy grew by about 3.1% in 2017, from growth rates of 3.2% in both 2015 and 2016 and 1.4% in 2014. Despite the ongoing political crisis in Catalonia, the EU recently raised its 2018 GDP growth forecast for Spain from 2.5% to 2.6%.
Spanish rental yields continue to recover
Gross rental yields on property in Spain continue to recover. In some places in Spain, but only for the smallest sized apartments, buying an apartment is now attractive from a yields perspective, which is a completely new situation for Spain.
Prices of apartments. Prices per square metre (sq. m.) of apartments in Barcelona range from around EUR 4,400 to EUR 5,000. In the heart of Madrid, i.e., Chamartín, Chamberí, Retiro and Salamanca, prices per sq. m. range from around EUR 4,300 to EUR 4,700. 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 2,800 to EUR 2,900.
Rents of apartments. Barcelona fetches the highest rents per sq. m. Apartments here cost around EUR 14.70 to EUR 20,25 per sq. m. to rent per month or the equivalent monthly rental income of around EUR 1,700 for a 120-sq. m. apartment.
Apartments in central Madrid cost around EUR 15.50 to EUR 17 per sq. m. to rent per month or the equivalent monthly rental income of around EUR 1,850 for a 120-sq.m. apartment.
For apartments in suburban Madrid, rents per sq. m. per month range from around EUR 9.60 to EUR 12 or the equivalent monthly rental income of around EUR 1,150 for a 120-sq. m. apartment.
Rental returns. The gross rental yield for apartments in Barcelona ranges from 3.90% to 5.00%, and in the centre of Madrid, rental yields are similar, ranging from 3.90% to 4.70%. In Madrid-suburbs, rental yields range from 4.15% to 5.25%.
Conclusion: All these yields figures are better than last year, which was better 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 19% 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 19% to 45% for 2012 and 2013.
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 remains robust, despite the Catalan crisisSpain’s economy started to recover in 2014, with GDP expanding by 1.4%, according to the International Monetary Fund (IMF). In January 23, 2014, Spain became the second euro zone country to exit its international bailout program, after Ireland. The economy grew by a healthy 3.2% in 2017, at par with the average growth rate of 3.2% in 2015 and 2016, mainly due to an increase in consumption on the back of falling unemployment, strong exports and a thriving tourism sector.
However, it has been a long, hard slog. Recession has been Spain’s normal condition for years, mainly due to the adverse impact of the global financial meltdown and the Eurozone debt crisis. The economy shrank by 1.7% in 2013, according to the IMF, by 2.6% in 2012 and by 1% in 2011. In 2010, the economy grew by a meager 0.02%, after a contraction of 3.6% in 2009.
Despite the ongoing political crisis in Catalonia, the EU recently raised its 2018 GDP growth forecast for Spain from 2.5% to 2.6%.
Spain’s economy was fuelled by property during the boom decade from 1997 to 2007. At the height of the housing boom in 2007, housing investment was no less than 7.5% of Spain’s GDP, significantly above the OECD average. The construction industry became a key employer of low-skilled workers. The increase in construction activity helped pull unemployment down from 24% in 1994, to 8.3% in 2007.
With the situation reversed, Spanish unemployment stood at 16.3% in January 2018, down from 18.4% a year ago and from an annual average of 22.6% from 2010 to 2016, according to Eurostat. Despite this, Spain’s unemployment is still the second highest in the OECD, next to Greece. The country’s overall unemployment rate is expected to fall further to 15.6% this year and to 15% in 2019, according to the IMF.
In February 2018, inflation stood at 1.1%, up from -1.1% in the previous month but down from 3% last year, according to INE. Annual inflation is expected at 1.6% this year, from 2% in 2017, -0.3% in 2016, -0.6% in 2015, and -0.2% in 2014, according to the European Commission.
Spain narrowed its budget deficit to around 3.3% in 2017, down from 4.7% in 2016, 5.1% in 2015, 5.9% in 2014 and 7% in 2013. The government aims to reduce the deficit further to below 3% of GDP this year to meet the target set by the European Union.
Spain’s gross public debt stood at about 96.7% of GDP in 2017, from 99.7% in 2016, 99.8% in 2015 and 99.3% in 2014. It is expected to fall to 95.5% in 2019.