Lower rates but more expensive houses: keys to buying a home

With the return from the holidays on the near horizon, home buyers will find a very similar panorama to the one they left. House prices will continue to rise and experts expect greater activity in the sector, after the drop in sales in May. Demand continues to outstrip supply by a large margin, the labour market remains solid and economic growth is supporting the robustness of activity, with the icing on the cake of lower interest rates following the first cut in the price of money by the European Central Bank (ECB) last June.

In the first half of the year, the price of new and used housing has continued to rise steadily. According to the Fotocasa website, the average value in Spain has risen by 8.4% this year, not far from the 7.5% indicated by Idealista, while Real Estate Appraisals (Tinsa) offers a much more moderate year-on-year growth figure of 3.2%. “The strongest impulses continue to be recorded on the Mediterranean coast and islands, with a greater tourist component. As for the employment centres and their metropolitan areas, they are accelerating slightly compared to previous months,” explains Cristina Arias, director of the Tinsa research service.

As for new housing, Sociedad de Tasación estimates a year-on-year increase in prices of 4.3%, which has led to an all-time high in June of 2,930 euros per square metre on average. “However, despite maintaining an upward trend, the year-on-year rate continues to slow down,” says Consuelo Villanueva, director of institutions and large accounts at Sociedad de Tasación.

Prices

According to Idealista data, Price developments show annual increases in all autonomous communities. The region with the largest quarterly increase is the Canary Islands (15.4%), followed by the Balearic Islands (10.7%), the Valencian Community (10.3%), Madrid (9.5%), Andalusia (8.2%), Murcia (7.2%), Cantabria (6.9%), Ceuta (5.8%), La Rioja (5.6%), Navarre (4.6%), Castilla-La Mancha (4.5%), Aragon (3.9%), Extremadura (3.9%), the Basque Country (3.7%), Asturias (3.2%), Castilla y León (3.2%), Galicia (3.2%), Melilla (1.9%) and Catalonia (1.5%).

But what can we expect regarding the housing market’s performance until the end of the year? The underlying scenario, according to a recent report by the Spanish Mortgage Association (AHE), is defined by accessibility problems due to the lack of available land, the increase in production costs, the slowness of urban planning processes for land qualification and development, and the lack of effective public initiatives to encourage the expansion of supply. The AHE points out that “the coming months will be marked by a reactivation of the market, residential demand that exceeds supply, which will bring more price increases and an improvement in financial conditions due to the interest rate cuts by the ECB.”

Although Bankinter analysts were confident that 2024 would end with a fall in housing prices, they have revised this forecast in a recent study based on how the year has evolved. They expect it to end with an increase in line with inflation and that in 2025 the increase will be 2%. The strength of the labour market, the shortage of housing supply, the sharp rise in rental prices and the process of interest rate cuts by the European Central Bank (ECB) support this change in forecast.

And the circle of forecasts is completed by the American financial analysis firm S&P Global, which in a recent work points out that the price of housing in Spain will rise by 4% this year, only surpassed by Ireland, where the increase will be 6%. It predicts that the rise will continue until 2027, although in a process of deceleration: in 2025 an increase of 3% is expected; in 2026, 2.4%, and in 2027, 2%. The main justification for these expectations is the improvement of the labor market, with a boost in family purchases, raising demand and, logically, prices, and also the greater ease of access to credit with the rate cuts.

Interest rates and mortgages

The evolution of interest rates is key for the housing market for the rest of the year After the ECB lowered the price of money by a quarter of a point, up to 4.25% last June. The Euribor, the index to which most variable-rate mortgage loans are referenced, fell below 3.2% on a monthly basis in August and will lead to the biggest drop in mortgage payments since 2013.

Luis Corral, CEO of Foro Consultores Inmobiliarios, divides the effects of a cheaper price of money between the housing developer and the buyer. “For the developer it will mean a cheaper loan, since an extra cost will be avoided in the developer loan, which now affects the price. When making your business plan, a drop in rates should have an impact on the final price.” And he adds: “For the user it helps a little, since they will have a lower cost in financing. This can facilitate access to the housing market for ownership, which is expected to lead to a return of buyers that will boost demand. And this is where we may have a problem, we must increase the supply of housing on the market, otherwise, if demand rises, the tension in prices will increase, especially in the areas with the highest demand.”

María Matos, director of research at Fotocasa, foresees a new mortgage war between financial institutions to achieve the greatest number of sales possible, as well as the return of fixed-rate mortgages to the banking showcase. “Even so, we will see how mortgage firms will experience a more pronounced slowdown compared to sales transactions because the investor profile will continue to have great weight in the market,” she says. A type of investor who, normally, buys the home in cash without the need for a bank loan. Thus, in 2023 there was a sharp slowdown in the residential mortgage market with a fall of 18.5%, while in the first months of this year the decline was only 1.8%. Experts expect a recovery in a more relaxed scenario for financing.

The new situation will also cause a change in the type of mortgage offered by financial institutions. With the rising rates, fixed-rate mortgages were reduced and made more expensive, and now, with a bearish scenario, they will be offered to customers again. The AHE indicates that part of the population could be waiting for more favourable financial conditions to make the decision to buy. And they will opt for mixed and fixed loans, which “will emerge as the main players in the market, providing greater stability to the system,” they maintain in their report. Thus, both loans represented 88% of new mortgages in April.

Activity

Last May, the National Institute of Statistics (INE) provided sales figures that shook up the housing world with 44,013 transactions, a 21.5% drop compared to the same month last year. Data not seen since 2020, when the population was confined due to the Covid-19 pandemic. The year-on-year drop in home sales in May was due both to the decrease in transactions on new flats, which fell by 14.4% year-on-year, to 9,105, and to those carried out on used homes. These were reduced by 23.2% year-on-year in May, to 34,908 transactions.

This fall is part of the volatility in the figures that are released each month. In June, sales rose again, to 50,099. The expert from Sociedad de Tasación predicts “a second half of recovery and a
n incipient expansion of real estate and mortgage activity.” And in view of the rise in the value of housing, market experts are faced with one last doubt: will prices themselves be a brake on the market? It seems that, for the moment, there are reasons for them to continue rising.

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