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PROPERTY

EXPLAINED: Will the price of properties drop in Spain?

With experts widely predicting a big drop in property prices across Europe, will they fall in Spain? And if so, by how much and when?

EXPLAINED: Will the price of properties drop in Spain?
Photo: Pixabay.

The market context

The European Central Bank (ECB) has warned that house prices are due to drop by as much as 9 percent across Europe over the next two years.

With inflation affecting economies across the continent, the ECB took the radical monetary policy move of raising interest rates and the Euribor, the rate tied to mortgages in Spain, has risen steeply since then.

READ ALSO: Why mortgage payments in Spain could increase by up to €120 a month 

The Euribor rate in September topped 2 percent, ending the month at 2.23 percent, which contributed to the highest annual increase in mortgage rates since 2000.

The 12-month Euribor rose from -0.50 percent in December 2021 to 2.50 percent today, with market forecasts esimating it could reach as high as 3.4 percent in the next 12 months. This could, in financial terms, mean an increase of over €350 per month for a new mortgage loan (€144,000 on average in Spain). 

Bank warning

In its latest quarterly report on the Spanish economy, the Bank of Spain has warned that the slowdown in housing investment experienced during the third quarter of 2022 will last for the rest of the year and in the first quarters of 2023.

This is due, the state bank suggests, to a rise in bank credit and interest rates, falling construction permits and general wholesale cost increases in construction materials.

READ MORE: What the Euribor rise means for property buyers and owners in Spain

With regard to house prices, the Bank of Spain explains that their steady rise was tempered slightly during the second quarter of 2022, though they continued to show notable year-on-year advances – an 8 percent increase according to the latest figures from Spain’s National Institute of Statistics, due largely to a combination of insufficient supply and relatively strong demand.

But with Spain’s property market remaining relatively strong, can we expect Spanish properties to fall in price as is expected across the rest of Europe?

Spanish exceptionalism

Although it is true that the ECB has forecast falls in property prices across the Eurozone, Spanish property market conditions are relatively unique to those of its European neighbours – particularly those in Northern Europe.

Experts believe the Spanish property market could better withstand the expected price drops across the continent, but this is not to say that property prices won’t fall at some point in 2023 or 2024 in Spain, but rather that they might not fall as much – 9 percent as suggested by the ECB – as its Eurozone neighbours. 

José García Montalvo, Professor of Applied Economics at Pompeu Fabra University in Barcelona, told Business Insider Spain that “what the ECB says does not apply to Spain. In other countries, prices are so high that the shock could be strong, but here [in Spain] we have hit the bottom.”

During the financial crisis of 2008 and beyond, it was southern European nations, led by Spain and Portugal, that felt the brunt of the the bursting real estate bubble.

As such, the Spanish property market never properly recovered or experienced a ‘boom’ as other northern European countries did. While it is true that prices have been rising in Spain, the property market has still not recovered itself and reached the levels of 2007 and pre-crash prices.

In fact, according to Spanish property search engine Fotocasa, housing on the Spanish market is still 34 percent below the pre-crash peak prices reached in 2007.

Simply put, the Spanish property market is better insulted from the oncoming price drops anticipated across Europe in the coming year or two precisely because it never recovered from the last property meltdown. The plummeting figures of 9 percent estimated by the ECB are therefore less likely to be seen in the Spanish market.

“It would be exceptional if we saw large declines when prices have not yet recovered from the previous crisis,” María Matos, spokesperson for Fotocasa, explained in the Spanish press.

How much could prices fall by?

So if the Spanish property market is expected to hold up better than other European economies, how much could prices fall by?

According to analysis from Bankinter, residential house prices in Spain are anticipated to fall by 3 percent in 2023 and then by another 2 percent in 2024 – an estimated 5 percent price fall over 2 years but almost half of the ECB’s European-wide prediction.

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MORTGAGES

How Spain will help homeowners with rising variable mortgage rates

The Spanish government and the country's banks have agreed upon a set of measures to help protect more than one million low and mid-income families from rising variable mortgage rates.

How Spain will help homeowners with rising variable mortgage rates

The plan was announced on Monday November 21st by Spain’s Ministry of Economic Affairs, which said that the agreement “will preserve financial stability” in the face of the sharp rise in interest rates that have been applied by the European Central Bank since August.  

The agreement still has to be brought before the Spanish Cabinet on Tuesday November 22nd, before its final approval.  

The deal will help alleviate the effects that high interest rates are already having on variable mortgage bills.  

For example, a person with a €150,000 mortgage at a variable rate to be paid over 30 years spent €448 in October last year, but the same mortgage this October (2022) was €675, which is 50 percent more.

Three in every four mortgages taken out in Spain are variable rather than fixed. 

READ ALSO: Why mortgage payments in Spain could increase by up to €120 a month

What are the new measures and who will they help?

The agreement will help families who earn less than €25,200 per year. They will be able to benefit from an improvement to the Code of Good Practices, which the banks agreed with the former right-wing Rajoy government in 2012.  

The code is currently limited to those with a maximum income of €24,318, but the new agreement aims to increase this.  

Those who benefit from the improved code will:

  • Be allowed to pay only the interest on their loan for five years.
  • Will have the maximum interest on their loan limited.
  • And will have the period in which to pay back the loan extended to 40 years. 

If after these three measures are applied, families are still having to pay 50 percent of their household income to mortgage repayments, then they will be allowed to request a reduction from their bank. Keep in mind though, the bank can refuse this request.  

Finally, if this is not enough or the bank refuses, families will receive a loan in order to help pay their mortgage bills to the bank.  

Previously, families could only benefit from the Code of Good Practices if there had been a significant alteration in their financial situation in the past four years.

This meant that many people were not eligible because the problem had come from the increase in mortgage rates, rather than a change in their own financial situation.

The new measures will also reduce the maximum interest rate that households who benefit from the code will have to pay. Specifically, the maximum will be reduced from 0.25 percent plus the Euribor to -0.1 percent plus the Euribor.

Conditions for new homes will also be included but these will be less favourable. The time in which they have to repay the interest will be reduced to two years instead of five and they can extend the repayment period to a maximum of seven years.

READ ALSO: How to get a mortgage in Spain if you don’t have a job contract

What effect will this have on mortgage repayments?

Spain’s Ministry of Economic Affairs believes that a household with a mortgage of €120,000 and a monthly payment of €524, will now see their bill reduced during the five-year grace period by more than 50 percent down to €246.

What about mid-income earners who don’t qualify?  

The measures will also introduce a new Code of Good Practices that focuses on the middle class. The objective is that these families will have “a more gradual adaptation” to the new interest rates.

This will be extended to those who earn up to €29,400. In addition, families who allocate more than 30 percent of their income to mortgage repayments will be able to benefit from it, although they will have to demonstrate that their mortgage burden has risen by at least 20 percent.

For these middle-class earners, the banks must offer a freeze on payment increases for 12 months, so they will continue to pay the same bill for one year.

Once that year has elapsed in which the instalments will not be able to rise, they will be offered a lower interest rate on those twelve months that have been frozen, which they must pay at the end of the loan period.

They will also have the possibility of extending the term of their mortgage by seven years.

Is there any other financial help for those struggling to pay their mortgages?  

Yes, other new measures being introduced include expenses and commissions being reduced to facilitate the change from variable to fixed-rate mortgages.  

READ ALSO: How to change from a variable to a fixed mortgage in Spain

Fees for early repayment and changing your mortgage from variable to fixed rate will also be eliminated during 2023.  

The two Codes of Good Practices are expected to be available from January 1st 2023, and will be voluntarily adhered to by financial institutions. However, if the banks sign the agreements, they will be obliged to comply.

The first Code of Good Practices approved in 2012 was signed by almost all credit institutions in Spain. 

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