MADRID – The Spanish housing market has attracted the attention of both domestic and foreign investors in recent years. The European Commission (EC) looked at the stability and sustainability of this market in the light of recent developments.
Last August, a year-on-year increase of 7.2% was recorded. According to the real estate portal Idealista, buying a house is now more expensive than a year ago in all autonomous communities, capitals, and provinces of the country. The European Commission carefully scrutinised the market and warned of overvaluation and falling prices.
Brussels believes that a country’s real estate market is overvalued if prices are far removed from the income of future buyers. The combination of overvaluation and falling prices poses a potential risk for both buyers and investors.
EC: Overvaluation of 20%
That is why the EC conducted a study into the Spanish housing market and its conclusion is as follows: the market is overvalued by no less than 20%. This means that property prices in Spain are not in proportion to the income of the population. This is therefore, a worrying signal for potential buyers and investors.
Factors that explain the overvaluation
Several factors contribute to the overvaluation of the Spanish housing market. First of all, there is a scarcity of available housing, which drives up prices. In addition, there is a strong demand for real estate, partly driven by foreign investors. High construction costs also play a role in the price increase.
Record number of foreign buyers in 2022
The housing market in Spain experienced an unprecedented period of real estate transactions in 2022. This resulted in a record number of foreign buyers entering the market. Although this seems positive at first glance, the question the European Commission asks is whether this growth is sustainable or whether there is a bubble.
As a positive factor, in relation to the bubble that burst in 2008, it is believed that risks have been reduced as the weight of the construction sector has been reduced relative to the economy as a whole. Moreover, macroprudential measures now oblige each country’s national banks to intervene when they identify a relevant imbalance. That is, the bubble is pierced before it grows. However, there are still significant risks associated with the repayment capacity of loans to households and their impact on consumption.
Falling prices in Europe, rising prices in Spain
A striking trend is that while house prices are falling in many European countries, they continue to rise in Spain. Countries such as Luxembourg, the Czech Republic, the Netherlands and Sweden are seeing price declines, while Spain, along with Greece and Portugal, is showing an upward trend. This situation creates a greater risk for the Spanish housing market. The committee warns that price increases in these countries could pose a risk if economic conditions deteriorate.