Real Estate Market Report 2023

EXECUTIVE SUMMARY

2023 has been a somewhat unusual year in the residential real estate market in Spain.

2023 sales will reach the second highest level Spain has seen in more than a decade, but also dropped meaningfully relative to 2022, a year in which the release of previously pent-up demand resulting from COVID drove an exceptionally high volume of transactions.

At the same time, the average cost of purchasing a home in Spain increased by about 4% over the last year and national prices remain about 14% below their peak in early 2008. In large cities, rental prices are increasing at a faster rate than purchase prices, which could be partially driven by higher interest rates making mortgages less accessible for local buyers.

The percentage of homes purchased by foreigners in Spain has reached 20%, up nearly four percentage points from five years ago. Of the six provinces that account for nearly half of Spain’s housing sales – Málaga, Barcelona, Madrid, Valencia, Alicante, and Murcia – all are seeing steady increases in foreign market share. In Málaga, Valencia, and Alicante in particular, foreigners represent around 40% or more of the market.

We expect 2024 to be a year of continued normalization, with transaction levels similar to or slightly lower than 2023. Prices are likely to remain relatively stable overall, with moderate increases in large cities and coastal areas where demand is far outpacing supply.

NOTES ON THIS REPORT

All housing data reflects residential free-market housing in Spain.

Figures reflect the most current available data, generally through Q3 2023. Any exceptions are noted throughout the report.

Data sources are noted throughout and include:

• Eurosystem Staff Macroeconomic Projections for the Euro Area (Dec. 2023)

• Bank of Spain Macroeconomic Projections for the Spanish Economy (Dec. 2023)

• U.S. Federal Reserve Board Summary of Economic Projections (Dec. 2023)

• Instituto Nacional de Estadística (referred to here as the Spanish National Statistics Institute)

• Ministerio de Transportes, Movilidad y Agenda Urbana (referred to here as the Spanish Ministry of Transport, Mobility and Urban Agenda)

• Idealista

• Spanish Notaries Office

La información presentada en este documento es de elaboración propia y sólo tiene fines informativos. La Sociedad rechaza expresamente toda responsabilidad por errores u omisiones de los datos presentados

ECONOMIC BACKGROUND

Spain experienced a strong real GDP growth of 2.4% by Q3 2023, showing better economic performance than its peers in the Eurozone which averaged an increase of 0.8%. Limited trade exposure to China and strong performance of the Spanish tourism sector in 2023, which currently accounts for 11.4% of Spain economic production, are considered the main factors contributing to Spanish outstanding performance.

In 2023, the Spanish general government deficit remained slightly above 3% of GDP reflecting the impact of high energy prices. The debt-to-GDP ratio gradually decreased in the first half of 2023, driven by strong nominal GDP growth.

The Bank of Spain and the European Central Bank hold similar expectations of Spanish and Eurozone GDP growth in the period 2024 – 2026. They predict a slight decrease in 2024 and gradually increase in 2025 and 2026 converging at rates around 1.5% to 2.0%.

The predictions for the Eurozone´s GDP growth for the period 2024-2026 are similar to those provided by the United States Federal Reserve for the U.S. economy. U.S. GDP growth is expected at 2.6% in 2023, to moderate in 2024 reaching 1.4% and leveling out closer to 2.0% in 2025 and 2026.

Of all the drivers behind the dramatic rise in inflation across the world in 2021 and 2022, perhaps the most acute is the surge in energy prices. High prices for electricity and fuel put continued pressure on inflation, forcing central banks to keep interest rates higher than otherwise.

However, inflation in the Eurozone has slowed down since its peak of 10.6% (11.5% in the EU) in October 2022 to 2.9% (3.6% in the EU) in October 2023. Spain's annual inflation rate fell to 3.2% in November 2023 as a result of cheaper fuel and tourist packages, and it is currently one of the lowest in the Eurozone, although it is still above European Central Bank 2% target.

The European Central Bank and the U.S. Federal Reserve Board recently stated that they intend to drop interest rates in mid-2024 and then continue to decrease them through 2026. If true, this would mean an increased purchasing power for buyers in the real estate market:

• All else equal, decreasing inflation means that incomes are effectively rising: the lower the price increases of the goods you want to buy, the farther your money goes.

• Since interest rates drive mortgage rates, decreasing interest rates means more affordable home loans.

DEMAND

Based on year-to-date data from the Spanish National Institute of Statistics, we estimate that 2023 home sales will reach approximately 600,000 by the end of the year, equivalent to an 8% reduction in sales from 2022 (Figure D1). Note that 2020 sales dropped significantly with the onset of COVID, resulting in pent-up demand that, when released, caused higher than normal sales levels in 2021 and 2022. Therefore, the 2023 reduction does not necessarily reflect a downturn in long-run demand but rather a normalization as we return to more standard market conditions in the absence of the pandemic. Comparing 2023 sales to 2019 pre-pandemic sales further illustrates this point: 2023 sales were 18.2% higher than in 2019, equivalent to a 4.3% increase in sales each year.

Six provinces account for roughly half of Spain’s total housing sales: Madrid (13%), Barcelona (10%), Alicante (8%), Málaga (6%), Valencia (6%), and Murcia (4%). Of these, sales in Madrid and Barcelona over the last year have been roughly flat to pre-pandemic levels, whereas sales in the remaining four provinces have reached levels equivalent to 4-7% average annual increases since the latest pre-pandemic period (Figures D2 and D3).

The data also appears to indicate a change in the source of demand for residential real estate in Spain. We note a reduction in the percentage of mortgages granted on the total number of homes sold (Figure D4), along with continued increases in foreign market share (Figure D5). These suggest a shift away from local first-time home buyers to foreign investors, who are less likely to need mortgages.

As of Q3 2023, 20% of homes sold in Spain are bought by foreigners, up from about 16% five years ago. Foreign market share varies significantly by region; for example, Málaga’s foreign market share of 40% is roughly double the national average whereas Madrid’s is roughly half at only 11%. All of the six provinces noted above have seen increases in foreign market share over the last five years, with Málaga seeing the biggest increase at +6.1 percentage points (Figure D5).

The UK, Germany, and France remain the top three countries from which Spain sees foreign buyers. While together these currently account for about a quarter of foreign demand, the market share of each has been steadily decreasing over the last two years. Foreign market share appears to be shifting outside of the Eurozone, with noticeably high sales growth over the last year in the U.S. (+24%), Russia (+38%), and China (+21%), even in the context of reductions in sales in Spain as a whole in 2023.

Factors likely to influence housing demand in 2024 include:

• New Digital Nomad Visa – Spain finally launched their new Digital Nomad Visa in January 2023. The visa allows non-EU residents to live in Spain while working remotely for an employer outside of Spain.

• Terminated Golden Visa program in Portugal – In February 2023, Portugal and Ireland terminated their Golden Visa programs, which had streamlined visa approval for foreigners investing in real estate above a certain financial threshold. Spain’s Golden Visa program remains in place for those investing €500,000 or more and may draw demand from buyers who would otherwise have invested in Portugal.

• War in Ukraine – According to census data from the Spanish National Institute of Statistics, the greatest population growth in Spain in 2023 was registered among Ukrainian citizens, increasing by close to 84,000 or 75.9% in 2023. This represents a new pool of renters and buyers in the housing market, but the overall impact is limited, as the group accounts for only about 0.2% of Spain’s population.

• Interest rates – If interest rates begin dropping as projected by the European Central Bank, that would make mortgages more accessible, which could increase demand.

• Inflation rates – Decreases in inflation rates can increase demand by strengthening consumer purchasing power. However, higher inflation rates can also boost demand as they raise an opportunity to invest in property as a hedge, since real estate values and rental income tend to increase with inflation.

Source: Instituto Nacional de Estadística -

*Estimated based on data through October and historical seasonality patterns

Figure D1: Spain Home Sales

Madrid (-0.6% avg)

Barcelona (+0.9% avg)

Alicante (+6.6% avg)

Valencia (+5.1% avg)

Málaga (+3.6% avg)

Murcia (+6.8% avg)

Figure D2: Spain Home Sales by Province January to September 2023

Figure D3: Spain Home Sales by Province and average annual increase since the latest pre-pandemic period

Source: Ministerio de Transportes, Movilidad y Agenda Urbana

Source: Ministerio de Transportes, Movilidad y Agenda Urbana

Figure D4: Percentage of Home Sales with Mortgages

Figure D5: Foreign Market Share, Q3 2023 and percentage point (pp) change over the last five years

Source: Spanish Notaries

2023

Source: Ministerio de Transportes, Movilidad y Agenda Urbana

Spain Málaga Barcelona Madrid Valencia Alicante Murcia

SUPPLY

In the years following the 2008 crisis, new housing production slowed considerably in Spain as the market worked to absorb the housing stock that had accumulated during the construction boom of 1997 to 2007. Accumulated stock levels have come down considerably since that time, representing about 1.7% of the housing market according to the most recent available data (Figure S1), and many of these homes have become obsolete or are in low demand areas.1 That combined with population growth has caused production to pick back up to some extent, but today Spain is experiencing a shortage in housing supply relative to demand in many areas.

This is especially evident in large cities and along the coast. The Spanish National Institute of Statistics periodically estimates vacant housing rates based on electricity usage, and the most recent available data shows rates of less than half the 14% national average in Málaga, Madrid, and Murcia. Vacancy rates in Barcelona, Valencia, and Alicante are less than 10% (Figure S2). Data on the amount of time homes stay on the market also suggests lower supply in these areas. According to a study from Idealista, one of the largest real estate platforms in Spain, 31% of homes come off the market within one month at a national level. That number increases to more than 40% in Madrid and Valencia, and to 36% and 39% in Málaga and Barcelona, respectively (Figure S3).

Ministerio de Transportes, Movilidad y Agenda Urbana, Instituto Nacional de Estadística

1Based on research by CaixaBank

Source:

Figure S1: Accumulated Stock of New Unsold Homes

Source: Instituto Nacional de Estadística

Figure S2: Estimated Vacancy Rates

Figure S3: Time on the Market

Source: Idealista (based on how long home listings were posted on their sales portal)

PRICES

Prices per square meter in Spain vary depending on the source but have generally increased by around 2-4% on average each year since 2019, with a price dip in 2020 coinciding with the arrival of COVID and followed by subsequent price increases (Figures P1 and P2). Sales prices recorded by the Spanish Notaries Office show an average annual increase of 3.4%, whereas valuation prices recorded by the Spanish Ministry of Transport, Mobility and Urban Agenda and asking prices recorded by Idealista show average annual increases of 2.3% and 3.9%, respectively.

The evolution of prices in key municipalities of Spain since 2008 looks similar to that of prices nationally, with the largest cities of Barcelona and Madrid experiencing more dramatic price decreases around 2013 to 2015 but largely following the same pattern as other key municipalities (Figure P3, based on valuation prices). The most recent year over year data shows prices increasing by 4.2% nationally, with Málaga, Valencia, and Alicante exceeding that figure significantly (Figure P4).

In many cases, recent increases were higher in municipalities with prices farther below their 2008 peak (Figure P5). For example, Valencia’s 11.6% increase comes in the context of prices that are still 24% below their peak, whereas the increase was much lower at 3.7% in Barcelona, where prices are only 7.7% below their peak. Málaga is a notable exception to this, where prices have largely recovered and are only 5% below their peak, but recently increased by 12.7%.

Rental prices have also increased significantly year over year in many of these municipalities, notably by about 20% or more in Málaga, Valencia, and Alicante (Figure P6). Rental price increases appear to be outpacing purchase price increases in many areas, which could possibly reflect higher demand for rental properties among foreigners or a shift in attitudes toward home ownership among the local population in the context of interest rate increases in recent years.

Source: Sales price data from the Notaries; valuation price data from Ministerio de Transportes, Movilidad y Agenda Urbana; asking price data from Idealista

Source: Sales price data from the Notaries; valuation price data from Ministerio de Transportes, Movilidad y Agenda Urbana; asking price data from Idealista

Figure P1: Spain 2 nd Quarter House Prices Prices Per Square Meter

Figure P2: 2 nd Quarter Year Over Year Price Changes

Figure P3: Valuation Prices for Key Municipalities Prices Per Square Meter

Figure P4: Valuation Price Changes in Key Municipalities

Source: Ministerio de Transportes, Movilidad y Agenda Urbana

Spain Málaga Barcelona Madrid Valencia Alicante Murcia

Figure P5: Valuation Price Variation from Peak

Source: Idealista, Ministerio de Transportes, Movilidad y Agenda Urbana

Figure P6: Rental Statistics for the Year Ending Q3 2023

Source: Ministerio de Transportes, Movilidad y Agenda Urbana