Housing Prices in Spain Could Fall 6% In 2020

Housing prices could stabilize from 2021 supported by several factors

Without notarial, registry or evaluation activity, real estate transactions should be “close to zero” as long as current containment measures are maintained. Bankinter’s analysts assume that these measures will directly affect 3 months of real estate transactions. Furthermore, they expect foreign transactions to be much reduced over the next few quarters, as certain limitations on international movements could be maintained. On a preliminary basis, they are estimating a negative impact of 35%, or up to 326,00 transactions less, in 2020, returning to minimum levels for the period 2012-2014.

In 2019, real estate transactions fell by 3.2% per year to 502,000 and 2020 has begun with a 1.3% drop until February, still without the Coronavirus effect. The declines are concentrated in the second-hand housing segment (4.1% in 2019), while new housing has grown by 1.3% due to a higher number of completed homes. The number of foreign buyers fell by 3.8% to 63.000 in 2019, with the weighting of international purchases falling slightly to 12.55% from 12.64% in 2018. The British continue to top the list of foreign buyers in Spain, followed by the French and the Germans.

The effects of COVID-19 on the Spanish economy will be marked by the duration of the containment measures and their cost in terms of employment. Spain is facing an unprecedented, although hopefully temporary, economic shock. Our preliminary calculations lead us to estimate a decline in GDP of 4.8% this year and growth of 4.0% in 2021e. We estimate the unemployment rate will rise to 18.2% in 2020 from 13.8% in 2019.

In this environment, decisions on whether to buy a home will be postponed for 6 to 12 months, and some of the demand will disappear for longer. This will mean a temporary imbalance between supply and demand. Completed homes would exceed 100,000 in 2020 and 2021 (up from about 75,000 in 2019).

In conclusion, Bankinter estimates a fall in house prices of close to 6% in 2020, absorbing the overvaluation that we are currently seeing in house prices over wages (compared to the average of the last 20 years). In 2019, house prices increased by 3.6%, according to the National Statistics Institute (INE). According to the real estate website Idealista, 2020 began with a fall of 0.3% in the first quarter.

Housing prices could stabilize from 2021 and should be supported by several factors:

Balance between supply and demand.  Supply and demand could meet up in 2021, with more than 120,000 homes completed. This compares with a structural demand of about 130,000 units per year (100,000 for home creation and about 30,000 purchases by foreigners). In 2022, there could even be a shortage of supply, due to the delay in starting work scheduled for 2020.

Economic recovery. Bankinter’s preliminary estimate suggests that the Spanish economy will return to growth in 2021 (4.0%) and that the unemployment rate will tend to fall again (to 16.9%).

Reduced financing cost. The stress rate is currently at 31.6%, still below its historical average (35.0%). The analysts forecast this low rate environment will continue in the coming years.

The rise in home rentals (up 50% on average since the lows of 2013): 1) far exceeds the increase in home prices (36.2%); and 2) brings the stress rate for renting close to 30%, in line with that for buying a home.

Attractive rental yield (3.8% gross) amid a low rate environment