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Another 2–3 years expected growth for Spanish real estate

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Spain’s real estate lost 40% since 2007, but the market is finally regaining momentum. With prices and developments expected to grow over the next two to three years, there is also finally hope for its ailing construction industry. Many experts agree, now is the time to invest, while the prices are still in favour of the buyers.

First visible growth in seven years

Spain’s bleak real estate market is finally climbing out of its seven-year plunge. When prices peaked back in 2007, the square metre was selling at an average of €2,862. Since then, the housing market has spiralled, losing a massive 44%, leaving the average square metre at just €1,594. Last year however, prices finally levelled out and with 0.2% growth between 2014 and April 2015, recovery may be in sight.

Average housing prices, thousand €/sq. m. Source: Idealista

A new year has brought new hope and 2015 opened with overall increases in Spain’s most popular destinations. Prices in Madrid gained 1.6%, while Andalusia saw a 0.9% increase, 0.8% in the Balearic Islands and Barcelona and 0.5% for the Canary Islands. Although pricing dynamics differed by region, the overall price fluctuation was positive but minor, gaining 0.1% nationwide.

Growth of real estate prices in Feb 2015 vs Dec 2014, %. Source: Idealista

However, despite the price plunge, the real estate market is still overpriced. According to Fitch estimates for the beginning of the year, prices are still overvalued by 10% but it doesn’t seem to be hindering the inexorable rise of the market: forecasts by Bankinter, a major Spanish bank, suggest real estate will go up by 1.5% in 2015, and another 5% in 2016. It is yet hard to say whether or not pricing will once again revisit 2007 levels, but the general outlook is leaning towards growth for the coming years.

Real estate market cycles last 6–9 years, fuelling growth predictions for the next couple of years at least. And Spain’s market has a traditionally turbulent past. In the late eighties (‘85–‘91), prices increased threefold before stabilising in the mid nineties (‘92–‘96). They skyrocketed 150% during the following decade (‘96–’07) before finally shedding 40% up until 2014. Should the country continue to follow its recent pattern, the market has some steep prices hikes ahead, potentially exceeding all expectations.

There are two major drivers for growth:

  • Strengthening domestic demand. Property prices have been dropping off but the economy and household income have been increasing, making housing more affordable for locals. It took up to 12 years for the average household to buy a house in 2007, whereas now it only takes 7.8 years. However, it isn’t without risk: unparalleled low mortgage rates may stimulate demand for loans, leaving some households in the dust and unable to repay their debts if the rates increase.
  • High demand from foreign buyers, both private and institutional investors.

The economy and Spain’s employment trends will also shape further pricing dynamics. According to Bloomberg, the nation’s economy achieved its highest growth rates in seven years during the first quarter of this year: GDP rose by 0.9% in Q4 2014 and 2.6%, nearly thrice that, in Q1 2015.

The country’s dark clouds are finally starting to dissipate and the economy is expected to expand by 2.9% during 2015 and 3% in 2017 and 2018 respectively. Harvard experts are even more hopeful, predicting Spain to be the EU's fastest growing economy by 2023. With GDP growth averaging 3.7% per annum and falling unemployment from 21.1% in 2015 to 15.6% by 2018, these positive shifts should garner investors' trust over the coming years. The sun indeed seems to be rising on Spain's real estate market and carrying in its wake, inexorable growth.

Increased demand in the midst of rising transactions

While the market has been down, this year saw the buyers return and the number of real estate transactions went up by 11%, compared with 2014. However, this increase doesn’t yet rival the brief peak of 2010, and is still over a third less than in 2007 with 37.4% less property transfers so far this year.

Average real estate sales by number of property rights' transfers, thousand/month Source: Instituto Nacional de Estadística

Demand is also growing. It gained 14% on average in Spain from December 2014 to February 2015 with the steadfast destinations leading the charge: Barcelona (+26%), Andalusia (+25%), Catalonia and Madrid (+19%).

Growth of real estate sales in Spain in Feb 2015 vs Dec 2014, %. Source: Instituto Nacional de Estadística

Today, homeowners are holding on to their property. According to the Spanish Associatio of Registrars (Colegio de Registradores), the average term of ownership grew by 55%: 7 years 4 months in 2007 to 11 years 4 months in 2014. Speculation is greatly reduced and profiteers who made money from buying and selling during the growth period have been dropping away. In 2007, 44% of homeowners held onto their property 5 years or more before selling, and in 2014 this number has reached 76%.

Investments in Spain's commercial property are also on the rise. According to Savills, over €7 billion was invested into the segment in 2014, three times more than in 2013. While the inflow has reached 2008 levels, it is still far off the 2007 peak.

Increased foreign demand

Having survived the bottom line of the crisis, prices are forecast to grow soon with increased demand from funds and private foreign investors.

George Kachmazov, founder and managing partner at Tranio, comments: “Early 2014, large investment funds from the USA and other countries witnessed the lowest point since the beginning of the Spanish market crisis and started investing, expecting it to grow sooner or later. This halted the decline, drove demand and prices began to increase in spring 2014. Meanwhile, local buyers became active as the mortgage loans were cheap. Now we expect 2–3 years of continuous growth. This is a good time to invest in Spanish real estate.”

According to the ownership records by the Spanish Registrars, foreign buyers accounted for the unprecedented highs of 13.01% in 2014, up from 8.97% in the 2009.

Average housing acquisitions by foreign citizens, thousand/month. Source: Colegio de Registradores

In 2014, the most popular destinations for foreign buyers were the Balearic Islands (32.63%), the Canary Islands (27.42%), Valencia (27.16%), Murcia (15.88%), Andalusia (15.24%) and Catalonia (13.23%). Alicante is the leading province (43.88%).

Foreign investments dropped off slightly in Q1 2015 to 12.22%, leaving way to rising domestic demand. However, the number of transactions with foreign buyers grew on average from 3,500 a month in 2014 to 3,700 in 2015.

Spaniards return to the market

A survey by Aliseda Immobiliaria, owned by Banco Popular, found that 80% of 8,500 Spanish respondents now believe it’s a good time to buy real estate here. 83% of them would prefer to buy rather than to rent and 94% of them say they need a mortgage.

Low interest rates truly shaped the demand from the local buyers in 2015, despite plummeting demand over the last years and 35% drop in volume since 2007. In April 2015, Euribor mortgage rates were at a historic low of 0.18%, a far cry from 5.4% in 2008. According to the website Spanish Property Insight, the overwhelming majority of locals (94%) prefer loans at variable rates. So, similar to the 2009 situation, when the Euribor index went down, demand rose and real estate acquisitions grew.

Average mortgages granted, thousand/month Source: Instituto Nacional de Estadística

The number of the home loans granted has grown by 32% nationwide since the end of last year. The Basque Country (+52%), Andalusia (+50%) and Barcelona (+48%) showed the largest growth among Spain’s best-selling regions.

Growth of number of mortgages granted in Feb 2015 vs Dec 2014, %. Source: Instituto Nacional de Estadística

The European Central Bank expects zero inflation in 2015 and growth of 1.5% in 2016 and 1.8% in 2017. However, as the consumer price index is not set to increase and affect the Euribor, the rates should remain low. Thus, short-term demand for loans is most likely to grow, driving up prices and general real estate demand. This situation however, is not set to last. Over the long term, Euribor is going to increase and borrowers that came to the banks during record lows may have to deal with some serious backlash. These loans, sold at record low floating rates now, will cost must more in several years as the rising variable rate pushes monthly payments ever higher. So the locals may prefer these variable rates, but it remains much safer to borrow at fixed rates. For example, according to Spanish Property Insight, Kutxabank launched mortgages at a fixed rate of 2.5% earlier this year.

No matter the mortgage, sales are on the increase and experts concur. Bankinter predicts the real estate sales volume to go up by 15% in 2015 and transactions could reach 400,000 this year and 450,000 in 2016.

Supply is also growing

Times have been hard for the construction industry since 2007. Proposals plummeted and there were 92% fewer construction permits in 2014 than in 2007. However, 53% more construction permits were delivered in 2015 than last year and it might be just the beginning. While the market is recovering, oversupply is constraining price growth.

Average area that received residential building permits, mln sq.m/month. Source: Instituto Nacional de Estadística

The oversupply of property to the market will not stifle price and sales growth according to experts from Bankinter. They estimate that, of approximately 500,000 houses and apartments on the market, one fifth of them might not find buyers due to disadvantageous locations and infrastructure. Bankinter’s warning is seconded by many market stakeholders it would seem. With BBVA Research reporting that 30% of 450,000 properties up for sale are unappealing and the Spanish Ministry of Construction announcing 563,908 superfluous properties at the end of 2013, this acute issue could last throughout 2016 before its effects are mitigated.

The banks own about 150,000 unsold properties that cover a wide range of real estate segments, spanning residential houses and apartments, garages, offices, warehouses and land plots. It has been suggested that these listings may be sold with substantial discounts (up to 50%).

Nevertheless, hope for the construction industry remains in the popular and undersupplied destinations where there are plans for new developments and property renovation.

“If you have made up your mind to buy real estate in Spain, we advise you to invest in good locations that will be in demand no matter the market. This does not mean the most expensive real estate, but rather one sold at the average price that is good quality and located in attractive neighbourhoods, new residential complexes with modern facilities and good infrastructure. And always remember the three real estate rules: location, location, location,” says George Kachmazov from Tranio.

Yulia Kozhevnikova, Tranio

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