Spanish housing momentum will weaken

Spain was one of the few countries, that saw a drop in housing market activity in 2020, mainly due to country’s exposure to tourism and hospitality (dampening employment prospects) and regulatory uncertainty (fears of country-wide rent controls). The job market uncertainty during the pandemic weighed on household’s house-buying willingness and ability. In the meantime, the decrease of tourist arrivals weakened the short-term rental market, while the Spanish government’s Law for the Right to Housing added more levels of complexity for potential investors. Yet, the housing market momentum picked up in Q2 2021 along with improving economic conditions, rising employment, changed household preferences, ultra-low interest rates and attractive rates of return on investment. The momentum in the housing market was set to continue this year, yet the invasion of Ukraine has changed the outlook. The outbreak of the war in Ukraine has dampened GDP growth prospects for Spain, as household purchasing power will be eroded by rapidly rising inflation. Real household income will see a drop of 4% this year even though employment should recover further. Also, mortgage affordability will worsen as the ECB gradually tightens its policy to prevent high inflation expectations from becoming entrenched. We estimate that the drop in real income by 4% this year along with a gradual increase in interest rates will dampen housing demand and lower the rise in house prices from 4.4% in Q4 2022 to 2% in early 2023. At the same time, we expect that house-purchasing power will be cushioned by accumulated household savings, buoyant employment, protracted housing construction, fiscal expansion (on the back of NGEU funds) and investor search for yields.