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Spanish housing market is now healthy

Last Updated: March 17, 2018

Spain houses for saleSpanish house prices increased 3.6% during the year to January 2018 (3% inflation-adjusted) to €1,410 per square metre (sq. m), a sharp improvement from a meagre growth of 0.96% (-1.92% inflation-adjusted) during the same period last year, according to TINSA.

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 price 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%.

Local house price variations

Spain house price index region

Most regions showed remarkable improvements during the year to January 2018.

  • In capitals and big cities, house prices rose by 5.1% y-o-y to an average of €1,466 per sq. m in January 2018, according to TINSA.
  • In the Balearic and Canary Islands, house prices rose by 4.1% to an average of €1,440 per sq. m.
  • In metropolitan areas, house prices rose by 3.2% to an average of €1,288 per sq. m.
  • On the Mediterranean Coast, house prices increased 3% to an average of €1,372 per sq. m.
  • In the rest of municipalities, house prices rose slightly by 0.9% to an average of €1,383 per sq. m.

Currently, the most expensive housing in Spain can be found in San Sebastian, a resort town on the Bay of Biscay in the mountainous Basque community, at an average price of €3,231 per sq. m., according to TINSA. It is followed by Barcelona, with an average price of €3,129 per sq. m., Madrid (€2,601 per sq. m.), Bilbao (€2,087 per sq. m.), and Cadiz (€1,938 per sq. m.).

Urban land prices are rising

Spain land prices

The average price of urban land transactions in Spain rose by 7.4% to €162 per sq. m in Q3 2017 from a year earlier, according to the INE.

All autonomous communities, except Aragon and Balears, saw strong land price increases during the year to Q3 2017:

  • In Madrid, average urban land price rose by 6.6% to €292 per sq. m.
  • In Andalucia, land prices rose by 7.9% to an average of €159.7 per sq. m.
  • In Cataluña, the country's second largest region, land prices increased 3.8% to an average of €183.2 per sq. m.
  • In Castile-La Mancha, average land price rose by 5.8% to €101.5 per sq. m.
  • In Galicia, land prices surged 21.3% to an average of €90.2 per sq. m.
  • In Castilla y Leon, average land price soared 25.4% to €67.9 per sq. m.
  • In Canary Islands, average land price skyrocketed 53% to €196.1 per sq. m.
  • In Valencian Community, average land price rose by 14.1% to €156.7 per sq. m.

During the first three quarters of 2017, the number of land transactions increased 16.7% y-o-y to 14,944 units while the value of land transactions soared 18.7% to more than €2.52 billion over the same period, according to the INE.

Housing cycle

Spain house price index type

From 1996 to 2007, Spain's national average house price rose by 197% (117% inflation-adjusted), one of Europe's highest house price increases. The price of coastal properties surged 250% (155% inflation-adjusted) from 1996 to 2007, as hundreds of thousands of foreigners, mainly from the UK, France and Germany, bought property.

In Madrid and Barcelona house prices rose 188% (109% inflation-adjusted) from 1996 to 2007, while prices in other inner provinces rose by 175% (101% inflation-adjusted).

The boom ended abruptly in 2008. The housing slump battered the Spanish economy, and brought spiralling unemployment. Developers were left with blocks of unsold properties and massive debts. Uncertainty engulfed the market.

Despite the price rises in the past two years, nationwide house prices are still about 38% (-45% inflation-adjusted) below the peak levels seen before the global crisis.

Transactions continue to rise strongly

Spain residential property transactions

In 2017, home sales in Spain surged 14.6% to 464,423 units from the previous year, according to the Instituto Nacional de Estadistica (INE), mainly due to surging second-hand sales.

The number of transactions for second-hand houses rose 15.4% to 381,163 units in 2017 from a year earlier, according to the INE. On the other hand, transactions of newly built houses increased 10.8% y-o-y to 83,260 units.

All autonomous regions and cities saw rising demand. During 2017, Castile-La Mancha recorded the biggest jump in sales of 24.7%, followed by Ceuta (22%), Madrid (18.9%), Valencian Community (18.1%), Asturias (17.5%), Aragón (17.2%), Cantabria (16.8%), Balears (15.2%) and Cataluña (13.6%). Strong sales increases were also seen in Andalucia (12.6%), Murcia (12.4%), La Rioja (12.1%), Castilla y Leon (11.5%), Canarias (10.7%), Navarra (10.1%), Extremadura (10%), and Galicia (8.7%). There were also modest sales rises in Melilla (5.7%) and País Vasco (5.4%).

Foreign demand continues to rise

Foreign investors started to return to the Spanish property market in 2014. In 2017, foreign homebuyers bought over 61,000 homes in Spain, up from about 53,500 from a year earlier, based on figures released by Property Registrars, representing about 13.1% of all home sales in Spain, from 13.25% in 2016, 13.18% in 2015, 13.01% in 2014 and just 4.24% in 2009.

Britons remain the number one foreign homebuyers, accounting for about 15.6% of all home purchases by foreigners in Q4 2017, followed by the French (8.2%), Germans (7.8%), Swedes (7.1%), Belgians (6.8%), Italians (5.2%) and Romanian buyers (5.1%). Chinese buyers are also increasing, with around 4.2% of total transactions.

The Golden Visa scheme, fully applicable since 30th September 2013, has resulted in increased interest not only from the Middle East but also from Asia and Russia. Under this system, any non-EU national bringing more than €500,000 (USD615,930) to invest is automatically granted a Spanish residency permit. In 2015, the laws were amended to make it even easier for applicants to obtain the Golden visa in Spain.

During the first three years, the Golden Visa scheme attracted 2,236 applicants, mostly Chinese and Russians. Spain received €2.16 billion in foreign investment as a result, with 72% invested in Spanish property, according to Spanish newspaper El Pais.

Chinese and Russian investors represent about 60% of all money invested in the said scheme. Since its introduction until early 2017, 714 Chinese nationals and 685 Russian investors were granted visas under the Golden Visa scheme.

The Balearic Islands are especially attractive to foreigners with about one third of total demand coming from foreigners, mainly due to its white-sand beaches and sunny Mediterranean landscape. It was followed by Canary Islands, Valencian Community, Murcia, and Andalucia.

Foreign demand is expected to remain robust this year. "With regards to foreign buyers, we expect sales from US, Canadian, Middle East and Chinese buyers to continue an upward trend, especially in the cities, whilst we also expect that the Scandinavians, French, Dutch and Germans will account for a bigger proportion of sales and the British a smaller proportion due to Brexit in the coastal regions such as Marbella and the Costa Brava," said Stijn Teeuwen of Lucas Fox International Properties.

Spanish interest rates are amazingly low

Following post-crisis European Central Bank (ECB) key rate reductions, the average mortgage rates in Spain dropped to 2.61% in December 2012, to 2.11% in December 2013, to 1.89% in December 2014, to 1.53% in December 2015, to 1.29% in December 2016 and to 1.21% in December 2017. In January 2018, the average mortgage rate in Spain stood at 1.2%, according to the European Central Bank (ECB).

In January 2018:

  • The interest rate for housing loans with initial rate fixation (IRF) of up to 1 year stood at 2.22%, down from 2.62% a year earlier.
  • The interest rate for housing loans with IRF between 1 and 5 years was 4.59%, down from 5.23% a year earlier.
  • The interest rate for loans with IRF of over 5 years was 1.2%, down from 1.26% a year earlier.

Spain interest rates

Spain's housing market has traditionally been extremely vulnerable to interest rate changes, due to the use of adjustable rate mortgages. Before 2004 more than 80% of new mortgages had initial rate fixations (IRF) of less than 1 year. The share of adjustable rate mortgages increased further to more than 90% of new loans from 2005 to 2006.

However, there has been a continuous decline in the share of adjustable rate mortgages in recent years. In 2015 only 62% of all new mortgage loans were adjustable rate. Then in the past two years, there was a further shift in favour of fixed rate mortgages. Coinciding with the 12-month Euribor's entry into negative territory, fixed rate mortgages represented more than half of all new loans contracted last year, according to the Spanish Mortgage Association.

New mortgages are rising

Mortgages totals are still falling because of the large downturn in new grants during the crisis. In 2017, the Spanish mortgage market contracted to about 45.2% of GDP, down from 48.27% of GDP in 2016, 51.51% in 2015 and 61.54% in 2011, according to the ECB. 

Spain housing loans

However, new housing loans are increasing sharply. In 2017, the total number of new home mortgages increased 9.7% y-o-y to 310,096-but still far, of course, from the average of 1.13 million new home mortgages granted every year from 2003 to 2008, based on figures from INE. The amount of new home mortgages also surged 16.6% to €36.19 billion over the same period.

"This is the largest registry of mortgages granted since 2011, which shows the consolidation of mortgage financing in our country," said Beatriz Toribio, director of Studies and Public Affairs of Fotocasa . "More mortgages are granted and for greater amount because there is liquidity and the interest for the purchase of housing has returned," he added.

Rents rising, yields recovering

In 2017, average apartment rents in Spain rose by 8.8% y-o-y to €8.15 per sq. m., according the real estate portal Fotocasa.

Rent increases were seen in almost all regions.

  • In Cataluña, rents were up 10.2% y-o-y to €12.39 per sq. m. in 2017
  • In Madrid, rents increased 6.3% y-o-y to €11.45 per sq. m. in 2017

Spain foreclosures

"Catalonia and Madrid are the two areas where the greatest demand for housing is concentrated, since they are economic and demographic centres, as well as tourism. According to our data, 27% of the population lives on lease, a percentage higher than the rest of the country," said Toribio.

Nationwide rents have risen by 18% in the last four years. Nine of the ten municipalities that recorded the highest increase in rents in the past four years are located in Catalonia. Gavà recorded the highest rent increase of 67% from 2013 to 2017, followed by Barcelona (48%), Castelldefels (45%), Sant Cugat del Vallès (42%), L'Hospitalet de Llobregat (38%), Esplugues de Llobregat (38%), Rubí (38%), Sitges (37). %), Cornellà de Llobregat (35%) and Madrid (28%).

Ciutat Vella, located in Barcelona, is the most expensive place to rent in Spain, with an average rent of €1,373 per month in 2017, followed by Sarria - Sant Gervasi (€1,331) and Eixample (€1,253).

Gross rental yields on property in Spain continue to recover, according to Global Property Guide research conducted in July 2017.  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.

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 4.40% 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. 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.

Housing glut should be cleared by 2018

The oversupply of homes reached its peak in 2010, when the surplus stock amounted to 931,615 homes, according to the Institute of Business Practices (el Instituto de Práctica Empresarial or IPE). Partly due to strong demand, the surplus of homes fell by 41% from 662,761 homes in 2014 to just 389,000 homes in 2015.

Spain residential constructions

Currently, the housing glut remains between 350,000 to 400,000 homes.

"It is clear that demand is up, mortgage lending is growing, and the price of property that people actually want to buy is stable or rising," said Mark Stücklin of Spanish Property Insight. "However, there is still a vast glut of homes built in the wrong place for which there is little demand."

Almería is the province with the highest level of excess housing stock, with 38.9%, followed by Cuenca (37.1%), Castellón (36.1%), Toledo (34.7%) and Murcia (32.7%), according to TINSA.

In contrast, Álava is the province with the smallest proportion of unoccupied homes, with only 10.3%, followed by Guipúzcoa (15.2%) and Navarra (17.6%).

The degree of overbuilding can be guessed at by looking at the number of housing starts from the National Statistics Institute (INE):

  • From 1990 to 1996, an average of 240,000 dwellings were started annually.
  • Between 1999 and 2002, with house prices rising rapidly, dwelling starts exceeded 500,000 units annually, rising to 650,000 annually 2003 - 2004
  • In 2006, dwelling starts exceeded 700,000
  • In 2007 commodity price rises brought rising costs - and starts slowed to 615,976.
  • A drastic decline followed. There were just 328,500 dwelling starts in 2008, and 159,286 in 2009. In 2010, there were 123,616 dwelling starts.
  •  In 2011 starts declined to only 86,252, and in 2012 to 50,000.
  • Dwelling completions followed a similar path. Despite the massive oversupply, dwelling completions exceeded 630,000 in 2008, most units having been started before the crisis. In 2009, dwelling completions dropped to 424,000. In 2010, completed dwellings stood at 276,883. A further decline in 2011 with only 179,351 dwellings completed. Only 133,415 dwellings were completed in 2012.

In 2016, residential building permits increased 29.4% y-o-y to 22,105-the highest level in five years but still far below the annual average of 160,000 from 2000 to 2007.

Then during the first three quarters of 2017, the number and value of residential building permits increased further by 13.2% and 20.3%, respectively.

Tinsa believes the housing glut will be cleared this year and new constructions will pick up in areas with high absorption rates to avoid shortages. These include Madrid, Barcelona, Malaga, Granada, Girona, Oviedo, Santander, Vigo, Pontevedra, San Sebastian, Gijon and Aviles.

"Construction activity currently is at 40% of pre-crisis levels in 2007, partially correcting the oversupply in place before the crisis," according to ratings agency Moody's.

Spanish economy remains robust, despite the Catalan crisis

Spain gdp inflation

Spain'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.

Spain unemployment

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.

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