The number of housing transactions fell by 14.4% year-on-year in August down to 49, 252 according to the data released in October by the National Statistics Institute. Sales have declined for seven months in a row.
The rise in financing cost is clearly affecting the residential mortgage market.
The 12-month Euribor, the index to which most Spanish mortgages are referenced, has rallied from minus 0.5% in August 2021 to over 4% in August 2023. The average interest rate of new mortgages granted in August has increased by 1.30 percentage points against the same month in 2022 which translates into a lower demand for mortgages.
Mortgages were down 22.7% year-on-year in August with highly interest-rate-sensitive borrowers now on the sidelines.Home sales activity is being supported by less rate-sensitive buyers and cash buyers. According to the General Council of Notaries most home transactions are cash purchases with only 48.9% of sales financed with a mortgage.
Despite the negative impact of high financing costs, the residential market continues to show resilience, especially in the new-build market, if we compare with previous years, excluding 2022 when sales hit their highest level since 2017.
Transactions between January and August are down 6.5% year-on-year, but they are still 18% above the 2019 level and 16% above the 5-year average for the same period. New-build sales have registered a milder decrease of just 2% due to the ongoing limited supply of new homes for sale on the market.
The year 2022 closed with 108,895 housing permits issued. This is below the number of new households formed, which is estimated by the national statistics institute to be over 200,000 households per year for the next five years’.
Residential construction activity is picking up slightly so far in 2023, with an increase of 8.4% year-on-year from January to August but still not enough to meet housing needs considering the current demographic trends.
Looking ahead, the slowdown in sales is likely to continue in 2024.
The European Central Bank left interest rates unchanged as expected on Thursday last week for the first time in over a year. It ended a streak of 10 consecutive rate hikes but interest rates are likely to remain higher for longer and no significant decrease is expected in the short term.
On the other hand, Spain’s economy growth is set to moderate from 2.37% in 2023 to 1.25% according to Oxford Economics, which will exert more downward pressure on housing demand. Home sales will likely remain subdued for the foreseeable future.