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MONEY

How will rising interest rates affect my life in Spain?

The ECB's decision to raise interest rates in a bid to soften the blow of inflation will have negative consequences for some and a positive effect for others. Here's how it will affect those with loans, mortgages and savings in Spain.

spain interest rates
The increasing costs of loans and mortgage payments comes at a time the Spanish economy is facing a perfect storm of financial pressures. (Photo by CESAR MANSO / AFP)

The European Central Bank’s (ECB) Governing Council raised interest rates on Thursday for the first time in 11 years, with further increases likely in the coming months.

The ECB has raised its interest rates by half a percentage point, to 0.50 percent, to try and slow inflation in the broader Euro area, which in June jumped to 8.6 percent.

The increase represents the biggest increase in 22 years.

In Spain, inflationary pressures are being felt even more severely, reaching record levels.

READ ALSO: Rate of inflation in Spain reaches highest level in 37 years

Why have interest rates been raised?

When prices are increasing too quickly – in other words, when inflation is too high – putting up interest rates is one way to try and slow it down and get the rate back down to the ECB’s 2 percent target rate. 

The theory – and hope for consumers – is that this reduces the prices of products and services in the short term, although Christine Lagarde, President of the ECB, said this week that war in Ukraine likely means that inflation “will remain at an undesirably high level for some time,” and warned that “the economic horizon is darkening” across the Eurozone. 

“Food and energy will continue to be higher than expected,” the president added.

How does it affect life in Spain?

For those of you living in Spain, the main effect of increasing interest rates is on loans, mortgages, and savings, something many foreigners living in Spain rely on.

The impact can be positive or negative, depending on your financial situation.

If you have substantial savings, you could make more money on that lump sum as your savings will become more profitable, particularly if interests rise again.

On the other hand, if you are looking for a loan or credit, or repaying debts or mortgages, doing so could become much more expensive. 

READ ALSO: The products that are more expensive than ever in Spain

Simply put, an increase in interest rates makes loans more expensive – not only at the consumer level but for national governments and banks, too – and it also directly affects mortgage applications and those applying for credit, as well as people who pay a variable rate mortgage based on the Euribor.

Fixed rate mortgages, experts say, are more insulated to interest rate rises.

For many years in Spain, the vast majority of new mortgages signed (as much as 95 percent of them) were variable rate and thus vulnerable to changes in interest rate payments

But that trend has reversed in recent years, with around 80 percent of Spanish mortgages now being fixed rate agreements better protected against increased interest rate repayments.

The Euribor is a measure of the average rate of interest rates that banks lend to one another across the Eurozone and used, in effect, as a reference for mortgages. 

This measure has also jumped up in recent months and is now close to 1 percent, and experts forecast that it will see out 2022 at around 1.5 percent this year and that it could surpass 2 percent in 2023. 

These increases in the Euribor rate can have a big impact on consumers and families. For example, the repayments on a standard variable interest rate mortgage loan (a €150,000 loan to be repaid over 15 years, for example) could shoot up by more than €150 per month.

Impact on living costs in Spain

The ECB’s interest rate rises come at a time when Spanish consumers are facing dire economic circumstances, crippled by skyrocketing inflation, utilities bills and increasings goods prices.

According to a survey published by Banco de España this week, the percentage of Spanish families that are forced to use more than 40 percent of their gross income to make debt repayments could rise to about 15 percent as a result of the interest rate rises.

According to the report, the proportion of households with this level of financial vulnerability was just 11 percent in 2020 and 10 percent in 2017.

The increase in debt-strapped consumers was concentrated in the lowest-income households, which jumped from 9.5 percent to 15.1 percent, and those where the main breadwinner in the household was under 35 years of age, which went from 4.4 percent to 6.8 percent, and among the unemployed, which almost doubled and went from 4.9 percent to 8.7 percent. 

The increasing costs of loans and mortgage payments comes at a time the Spanish economy is facing a perfect storm of financial pressures. 

The economic shutdown during the Covid-19 pandemic, which included heavy job losses, combined with rising utilities bills, food prices and rampant inflation – partly caused by war in Ukraine – means that at the very time when many Spaniards might consider taking out a loan to help them survive these pressures, doing so has become more expensive.

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PROPERTY

Will Spain’s Canary Islands limit sale of properties to foreigners?

There are calls in Spain’s Canary Islands to limit the purchase of properties by non-residents and foreigners, but could authorities legally do this and what are other potential solutions to the archipelago's housing problem?

Will Spain's Canary Islands limit sale of properties to foreigners?

Canary nationalist political party Nueva Canarias wants the regional government to address the large number of property purchases by non-residents in the archipelago, and to an extent limit the number of properties that can be bought by foreigners in the popular holiday islands. 

This comes after Spain’s other archipelago, the Balearic Islands, also started this same debate in November 2022, with the regional Senate agreeing to discuss solutions.

READ ALSO: The plans to limit foreign property buyers in Spain’s Balearics

The Canary Islands are in the midst of a housing crisis, with high rents, a shortage of properties, and an increase in holiday homes.

The main islands of Tenerife and Gran Canaria also suffer from overpopulation.

With an area of 7,447 km2, the archipelago is one of the smallest regions in terms of landmass, but its 2.2 million inhabitants rank it seventh in terms of regional populations in Spain, and in practice this means there’s less space on which to build homes.

In fact, the Canaries have one the highest population densities in Spain and Europe with 302 people per km2. Gran Canaria, where the most populous city of Las Palmas lies, is higher still: 548,41 inhabitants per km2.

“We have a very serious residential problem that can get worse,” said the Nueva Canarias party spokesman Luis Campos, who wants to limit the number of foreigners who can buy property on the islands. 

“If their properties are rented out, it shouldn’t have a negative effect. It could even improve the housing stock in this sense… But another thing would be to buy a flat in a popular neighbourhood and renovate it with the intention of obtaining very high rents from the lease. This can lead to processes of social change and gentrification”, explained Campos.

“Another scenario would be that foreigners buy a home in order to rent it out on Airbnb or for their own seasonal use. In these cases, it would reduce the amount of available housing on the islands,” he added.

In the third quarter of 2022, 33.69 percent of homes in the Canary Islands were purchased by foreigners according to data from Spain’s College of Property Registrars.

This is the highest proportion in Spain, ahead of the Balearic Islands at 31.46 percent and well above the average in the whole of Spain at 15.92 percent.

Buying property in the Canary Islands is seen as a good investment asset for many foreigners due to the relatively lower cost, mild year-round weather, beautiful surroundings, and strong tourist industry.

canary islands limit property purchases foreigners

Las Palmas de Gran Canaria is the archipelago’s most populous city with 378,000 inhabitants. Photo: slavikfi/Pixabay

What these stats don’t tell us, however, is if most of these purchases are by foreign residents or non-residents.

Experts believe there are clues that point to the fact that many non-residents are buying homes, such as the high percentages of mini 40m2 apartments being sold and the high concentration of second homes located in municipalities with the most tourists.

Alejandro Armas, a Tenerife geographer at the University of Leipzig, told El Diario that there should be no difference in whether the houses belong to foreigners or not. For him, the key lies in what the properties are used for, whether they’re being rented out to the local population or only used as tourist rentals.  

So far, it’s not exactly clear what the Nuevas Canarias party wants the exact rules to be, but they have cited examples of the Balearic Islands where they have asked that the rules “prevent second residences from eating up primary residences”.

Is it possible to restrict the number of foreigners buying homes?  

Denmark, Malta and the Aland Islands in Finland all have restrictions on how non-resident foreigners can buy properties in their territories. However, they introduced these before entering the EU and these limits were factored in and accepted by Brussels.

For local authorities in both the Balearic and the Canary Islands it could prove difficult to go against the EU’s legal principles of the free movement of people and capital, experts say.

This means that other potential solutions may be needed. 

Many agree that there are several solutions to the problem that don’t actually involve introducing purchasing limits for foreigners.  

One potential solution would be to increase taxes. The Spanish government is already seeking to amend the wealth tax laws and wants to introduce a new tax for high-net-worth individuals.

This means that non-resident taxpayers whose Spanish real estate assets are worth more than €3 million would have to pay an extra tax.

It is believed that this would deter the highest earners from buying up luxury properties on the islands. The average sale price per square metre in the Canary Islands is higher among non-resident foreigners (€2,522) than among residents (€1,622) and nationals (€1,560), according to the latest figures from Spain’s General Council of Notaries.

Another solution is to follow a measure similar to what has been done in Barcelona to make it very difficult to buy properties to rent out on Airbnb. In the Catalan capital, it’s illegal to rent out your property to tourists on a short-term basis if you don’t have a tourist licence and the City Council is no longer issuing these.  

There are also policies in other countries that serve as examples, such as Ontario in Canada which has added a 15 percent tax for non-residents on to the sale of any home in Toronto and the surrounding area. While in New Zealand, they have also prevented non-resident foreigners from buying real estate from the existing housing stock.  

It’s worth keeping in mind though that a study carried out by American economists found that these last two models did not ultimately lead to a decrease in the number of foreign property owners. 

It remains to be seen what the outcome of the Canary Islands’ study on foreign property owners will be and ultimately what solution they decide upon. 

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