Why are property prices in Spain not dropping like elsewhere in Europe?

As house prices drop across in the UK, Germany and numerous other European countries, Spain's property market is bucking the trend.

Property prices across much of Europe are falling. The price of housing in the UK for example has fallen at its highest rate in 14 years. In Germany, housing prices have recorded their biggest year-on-year drop since 2000. The Austrian housing market is also experiencing a major downturn, property prices in Denmark are down by 7.6 percent as well, and in Sweden they've decreased by 6.8 percent.

According to Eurostat data cited in the Spanish press, price data for the second quarter of 2023 indicated a decline of 1.7 percent year-on-year in the price of housing in neighbouring European countries, but Spain has bucked this trend with a 3.7 percent increase.

The price of housing in Spain increased by 2.1 percent in September while the average of the Eurozone countries barely grew by 0.1 percent. In total, nine EU countries registered lower prices in the second quarter of 2023 than the previous year.

In Spain, property prices rose by more than 6 percent in the first half of the year, and the market has experienced nine consecutive quarters with increases of more than 3 percent.

Yet property experts have pointed to something of a paradox in the Spanish market: that these consistent price rises come amid falling sales numbers overall.

So why is Spain bucking the European trend?

Supply shortages

Put simply, supply scarcity is one of the main driving forces behind the price rises in Spain. Despite the fact that the rise in interest rates has hardened access to the property market in some ways, and reduced part of the demand, the supply is still insufficient for those wanting to buy. "Supply has been growing too slowly for several years as it seems to keep pace with demand," ING Economics points out.

The price increases, combined with rising mortgage interest rates, has had a direct impact on the signing of mortgages in Spain (down -18.8 percent) and the sale of homes (down 10.5 percent), which have both been falling for six months, according to data from Spain's National Institute of Statistics (INE). However, these falls are weaker than in other countries and the number of people buying property in Spain in cash has risen.

Foreign buyers

Many of these cash purchases are made by foreigners. An influx of post-pandemic foreign buyers in the Spanish market has also added additional pressure to demand and caused prices to rise. This is especially true in the traditional tourist areas popular with foreigners, namely the coastal regions of the Mediterranean, the Balearic Islands, and the Canary Islands.

Capitalising on favourable visa rules, new data has shown that the number of Americans in particular coming to Spain and buying property has increased by almost 37 percent.

Foreigners also play another role: the use of tourist rentals, which also inflate prices. Post-pandemic, the strong recovery of the Spanish tourism industry, has led many homeowners to rent out their homes as tourist accommodation, compounding the supply scarcity in the market by reducing long-term housing stock.

European bubbles

Many experts looking across Europe also point to self-correcting property bubbles in other European cities that aren't applicable to the Spanish market. José María Basáñez, President at appraiser Tecnitasa, agrees, told EPE that "the price of housing in several European countries is correcting downwards, especially in those countries where it rose the most in recent years, and that it was at a much higher level than in Spain."

In simple terms, this means that in many other European capitals property prices grew considerably following recovery from the financial crisis (much more than in Spain), created localised property bubbles, and that it is normal that they would now self-correct, especially when compounded by broader economic pressures.

Growing number of households

Experts also pointed to net household growth in Spain, partly due to immigration, far exceeds net supply growth, which worsens the housing stock scarcity and puts further upward pressure on house prices.

Spanish economy

Spain's relatively strong economic performance has also played a role in the price increases, with economic growth above levels of many other European countries reinforcing the property market. Forecasts from the Bank of Spain predict that the Spanish economy will grow by 2.3 percent in 2023 compared to average growth of 0.5 percent across the Eurozone.

Pandemic prices

Prices largely maintained steadier in Spain during the pandemic than elsewhere. The Spanish market 'overheated' less, in the words of Spanish outlet El Economista, during the pandemic than in other Eurozone countries, which has likely contributed to a more modest slowdown compared to countries where the market was more inflated during this period.

The ECB estimates that the overvaluation in the Spanish property market is 10.3 percent, lower than in most of the other economies of the Eurozone (12.8 percent average). In the case of the Netherlands, overvaluation estimation amounts to 19.8 percent in Germany, 14.8 percent. Like with the self-correction of post-crash price inflation, the Spanish property market has less price rises to adjust to.

Source: thelocal