What awaits the Spanish housing market in 2023?

Less sales, rising rents and more mortgage effort is expected.

CaixaBank Research anticipates a sharp drop in sales, three new rate hikes and more rent increases.

CaixaBank has put numbers on the scenario that the housing market is facing in 2023. According to the research service of the financial institution, the coming months will be difficult for the real estate sector due to the impact of the economic slowdown, the rise in prices interest rates and the still high inflation in the purchasing power of families.

In general terms, CaixaBank Research estimates that sales will fall this year by more than 25%, that house prices will adjust moderately and that the mortgage effort rate will worsen. It also predicts a slight decrease in construction costs, more increases in rental housing income and three new increases in interest rates by the European Central Bank (ECB), which has room to increase an additional point.

Sharp drop in sales

The sale of homes signed in 2022 its best result in the last 15 years, but this year the forecast is that it will register a drop close to 25%.

In a recent report on the real estate sector, the entity's research service states that “we are leaving behind a year of 2022 in which the demand for housing has exceeded all expectations. The number of purchases and sales had already been growing strongly since the second half of 2021, mainly due to the change in preferences regarding the place to live caused by the pandemic, but said growth intensified in the first half of 2022 due to the advance of purchases and sales to hire a mortgage at a more favourable fixed interest rate given the prospect that the ECB would increase interest rates to deal with runaway inflation”.

But, as Judit Montoriol Garriga, senior economist at CaixaBank Research, explained during EFIMAD, a real estate event organized by CaixaBank and ASPRIMA, in 2023 and 2024 sales will move closer to the historical average than last year's levels.

Specifically, it has put the number of home sales in Spain at 480,000 in 2023 and the volume at just over 500,000 in 2024. For this year, the forecast is that the volume of transactions will fall by close to 26% (in 2022 it registers 649,494 units in the registers, according to the INE), although it will remain above the historical average (450,000 units).

Moderate Home Price Adjustment

Regarding prices, the research service believes that an adjustment will take place, although it will not reach the level of correction that countries such as Canada, New Zealand or Sweden are experiencing, where the market was overheated.

House prices in those countries have been adjusting since the middle of last year and, from recent peak levels, in Sweden they have fallen by about 12%; in the US, around 5% and in the UK, around 4%.

In the case of the domestic market, "the price is beginning to show signs of moderation" and he believes that "the adjustment will be limited. In Spain, no imbalances have accumulated in the 2014-2022 expansionary cycle that would lead to a sharp drop in the sector being expected”.

Rise in mortgage effort

The senior economist at CaixaBank Research has also stated that the theoretical mortgage effort of families (that is, the percentage of income that a household must allocate to pay the loan) will rise sharply in the coming months. It currently stands at 33.6%, slightly above the level recommended by experts, although it could reach 38% in the first half of the year, levels not seen since the end of 2011, according to the Bank of Spain's historical series.

At that point, Montoriol Garriga added, "it will fall due to the fall in housing prices and an improvement in family income thanks to wage increases and better inflation." Even so, by the end of 2024 the effort ratio could be around 34.8% (more than one point above the current level).

Higher rental income

Another of the forecasts that the entity manages points to new increases in rental prices in Spain. And that the year has started with record income, according to idealista.

Despite the fact that the price is already at maximums, CaixaBank Research predicts an average rise of 2.8% this year. In the case of new leases, considering as such those that are up to six months old, the expected increase is much higher and could be close to 7.7%.

In addition, it warns that the supply of new rental homes will continue to be well below demand. "The pressure on the demand side may be even higher than in recent years, to the extent that the increase in interest rates makes access to home ownership more difficult and leads a greater proportion of the population to the rental market Although the supply of rental housing is expected to increase in the medium term, supported by investor interest in this segment (co-living, built to rent, etc.), it will possibly be insufficient to cover the growing demand", he stresses the agency's sectoral report.

Three new rate hikes

What the research service also takes for granted is that interest rates have not yet peaked in the euro area, as inflation remains very high, including core inflation. The European Central Bank (ECB) can still raise interest rates by one point", with a rise of 50 basis points in March and two more of 25 basis points each.

Thus, they are confident that the price of money will reach 4% soon, compared to the ceiling of 5% that they foresees for the US Federal Reserve, in line with what the consensus foresees (which speaks of a maximum rate of 5.25% in the first world power).

"The market is already discounting interest rate cuts in the US in 2024, but the euro area is further behind. We are in a restrictive zone, which should cool demand, but central banks will have to maintain restrictive rates for a while," has pointed out.

Stability in the production of new homes

Regarding the production (construction) of new homes, the current trend will continue in the coming years, which means a development of around 100,000 units per year, well below the 200,000 new homes that will be created in 2023, according to the INE, and of the 220,000 in 2024. Therefore, he has insisted, "there will continue to be a shortage of supply."

The economist has insisted that the municipalities where there is a greater imbalance between supply and demand are those that suffer greater demographic pressure, such as Madrid, Barcelona and their metropolitan areas. "The construction is well located, because it is being built where there is demand, but it is insufficient,".

Fall in construction costs

Another key piece of information for the real estate sector is that construction costs will fall this year, albeit slightly. According to data from the study body, between mid-2022 and January 2023, costs have been reduced by 22%, and "residential construction costs in Spain could be reduced by 3% this year." Despite the decline, by the end of this year costs will still be 15% above the pre-pandemic level.

"The good news is that they are not going any further, but it does not seem that they are going to be corrected," pointed out the senior economist at CaixaBank Research.