Inflation and rising interest rates have significantly affected the real estate market. Analysts at CaixaBank Research are compiling data, outlining possible scenarios, and modeling how Spain’s home sales might evolve in the months ahead. The early, uncertain conclusion is that a clear slowdown is likely this year and next, but unlike the 2008 crisis, the market is not expected to experience a severe contraction in activity.
The anticipated slowdown is tied to high inflation, which erodes household purchasing power and nudges central banks toward tighter financial conditions. Yet, experts expect inflation to ease in the near term, allowing interest rates to stay near historically moderate levels. The Euribor rate could sit around 1.8 percent in the fourth quarter of 2023, a level that should help limit the adjustment pressure on the Spanish real estate market and reduce the chances of a pronounced downturn in the sector. Projections suggest home sales could fall by 2.8 percent in 2022 and by 10.8 percent in 2023, while housing price growth is expected to slow to roughly 2.2 percent in 2023 after a 6.6 percent rise forecast for 2022.
The strength in demand in recent months is largely tied to shifts in housing preferences following the pandemic and the redirection of savings accumulated during that period into real estate. Household balance sheets and the financial sector are healthier, and there is no excess supply expected to trigger a broad contraction.
In this environment, the share of income allocated to housing is projected to rise to about 40 percent, with the rate of financing costs affecting investment decisions for developers and builders. This could constrain the supply of new homes and contribute to higher prices. CaixaBank Research analyzes both new and existing housing markets, noting that they account for roughly 20 percent and 80 percent of sales in Spain, respectively. The impact of higher building material costs is particularly pronounced in areas with cheaper land prices, although overall housing prices are affected as well.
The European Central Bank’s ongoing cycle of rate increases to combat inflation raises questions about how the real estate sector will respond to tighter money conditions. While the scenarios remain uncertain, market confidence remains, and current models include gas market dynamics that add complexity to predictions. Inflationary pressures are expected to stay moderate. The most plausible forecast suggests purchases and sales could decline by no more than 10 percent in 2023. Higher mortgage costs push households to tighten their budgets, cooling demand and shaping a noticeable slowdown in activity.
clockwise evolution
The visual representation of the market cycle shows the current phase of the housing market and the trajectory of prices and transactions in Spain. Typically, market weakness becomes evident when time on the market increases and transaction volumes fall, signaling a slow-down zone. After a few quarters, this can lead to price moderation or even a contraction in some cases.
Market adjustment often deepens and lasts longer when imbalances were larger in the previous expansion. The downturn from 2009 to 2013 stands out as particularly long and intense, with the contraction phase spanning five years. In contrast, 2020 saw the real estate sector temporarily regulated due to pandemic mobility restrictions.