rewritten version of housing market outlook from euro area financial stability report

No time to read?
Get a summary

The rise in housing values from the previous year’s surge is expected to continue in the medium term. The Bank of Spain foresees a gradual lift in prices between 2015 and 2019, with quarterly gains ranging from 0% to 6%. This outlook reflects a demand that could be tempered by the rapid rise in interest rates aimed at curbing inflation. A soft landing is anticipated, with prices settling rather than spiking, according to observations by the monitoring body since 2020 and by Ángel Estrada, a key voice within the financial stability organization.

Housing values fell sharply after the market bubble burst, dropping about 37% from 2007 to 2013. By early 2014, a recovery path emerged, and the pace began to ease in 2019, even as the onset of the COVID-19 pandemic disrupted momentum. Prices rose 0.9% in the first quarter of 2021 as the economy reopened, followed by renewed demand during lockdown periods. The overall peak occurred in early 2023, with prices up 8.5% from the preceding year.

Since then, a marked slowdown has been evident, with growth between October and December at 5.5%. The Central Bank of Spain projects a continuation of this trend into the first quarter of 2023. The demand for housing and the volume of new mortgages slowed notably in the latter half of the prior year. What’s more, price developments have cooled due to persistently tight supply and a time lag before policy changes filter through to the market. The financial stability report highlighted that a reduction in purchasing power, ongoing uncertainty, and stricter lending terms have tempered activity in the housing market.

private vulnerability

In the referenced report, the Bank’s president warned about the link between house prices and household income, noting that income levels remain elevated and have shown a rising trend since 2014. A separate annual review labeled this situation as a private vulnerability, tied to access to housing and the tightening conditions faced by both owners and renters in recent years. Across households, ownership declined from 83% in 2011 to 74% in 2020, and among those under 35, ownership fell from 69% to 36%.

Although the issue is connected to labor market dynamics, mortgage criteria, and housing supply, falling prices could be welcome news in moderating a previously elevated market. A modest positive shift is expected to persist over the next quarters, approaching balance as financing conditions tighten. By late 2022, housing market imbalances remained positive but less pronounced, largely driven by higher home prices and substantial rent reductions available to households. The trajectory toward tighter financing is seen as likely to ease these imbalances in the coming quarters.

moderate exaggeration

The supervisor estimates an average overvaluation of about 5.23% at the end of the previous year, with a range from 3.71% to 7.92%. These figures arise from four valuation methods that consider factors such as household income, interest rates, the relationship between credit and GDP, and historical price trends. The assessment suggests that rate hikes have a delayed impact on the economy, taking up to two years to fully transmit. The result would be a more tempered real estate market, reducing existing signs of imbalance as demand slows due to higher borrowing costs.

The European Central Bank has noted signs of overvaluation in Spain beginning in 2017, though the level remains well below the bubble peak of 2007 and markedly below the eurozone average. Estimates for Spain range from 1% to 13% overvaluation by the end of September, compared with 1% to 27% for the broader euro area. The ECB uses four valuation methods that compare prices to long-run averages since 1996, factoring in interest rates, GDP, housing stock, and household income trends to assess whether current prices align with fundamentals.

No time to read?
Get a summary
Previous Article

Delusional Disorder and a Ten-Year Search for Luzdivina González

Next Article

Iniesta’s Return Dream: A Look at His Barcelona Affection and Ongoing Journey