The boom experienced since the pandemic, inflation with the consequent rises in interest rates and the deterioration of the economic situation have created a kind of perfect storm around housing. In 2023, house prices will fall in almost all Western economies, falling as much as 10% in some countries. But that will not be the case in Spain, according to Fitch, which places the Spanish sector as the one that will best resist the wave of depreciations that is going to sweep the European real estate markets. That won’t stop prices from slowing down: from 6% this year to 2-4% next year, according to a credit ratings agency report released Wednesday. In addition, delinquency will grow slightly and access to housing will be complicated almost everywhere in a general scenario of recession, although the situation is far, according to the authors of the report, from resembling what was experienced in the 2008 crisis.
For Spain, in fact, the scenario envisaged by Fitch would mean being at the opposite of what happened in the Great Recession. If then it was at the head of the economies most damaged by the bursting of the real estate bubble, now it would be one of the few capable of maintaining growth. In Europe, the only one together with Italy. In the rest of the world (a total of 15 countries are analysed), Japan and the three Latin American economies included in the forecast —Mexico, Colombia and Brazil— join. Mexico is the only one where growth is expected to be higher than that of Spain, with between 6% and 8%, although it is also lower than this year (10%).
There are several reasons, starting with the fact that prices in Spain have not experienced in recent times, not even remotely, the debauchery that has been seen in northern Europe, Canada, the US or Australia. But the authors of the report also highlight “the stable unemployment forecast” (it places it at 13%, just a little more than 12.9% this year) and the stricter conditions for granting mortgages “applied since the housing crisis [de 2008]”. That will cause the market to slow down without actually falling, although it will all depend on what interest rates rise. The macroeconomic context that is contemplated is that the euro area experiences a slight recession this winter (that Spain will also resist better than others as it is the large European economy with the highest GDP growth in 2023, 1.4%) and that the European Central Bank raise the official price of money to 3% (now it is at 2%).
Nominal growth in housing prices between 2% and 4%, Fitch points out, will not free Spain from a fall in real prices, since inflation will be above those limits. In other words, in relation to the general rise in prices, housing will really be getting cheaper. This is an effect that is going to be seen in all countries, whether it depreciates or not, but it has a downside: since wages are not going to rise in line with inflation either, housing will actually become more unaffordable. “Even in countries where prices have not skyrocketed in recent years, such as Italy and Spain, the increase in the cost of living and interest rates will put pressure on those with mortgages, especially those with variable loans,” say the authors.
In all countries, this will translate into an increase in delinquency in 2023. Spain is the country with the highest delinquency and among those that show a more consistent upward trend, since it is expected to rise for at least two years (that is, say, also in 2024). However, it is in all cases very moderate growth (less than one percentage point in Spain, and light years from the 13.6% it reached in the Great Recession). In favor of this moderation plays “the high percentage of fixed-rate mortgages that have been signed in 2020 and 2021”. These mortgages, immune to rate fluctuations, have traditionally been a minority in Spain, but their contracting has skyrocketed since the pandemic and now they account for seven out of ten new loans.
On the other side of the coin are the majority of mortgage holders who still have variable loans and are “those with the highest risk of defaulting.” But Fitch believes that two things will help mitigate the impact of the rate hike. On the one hand, “the recently announced relief measures promoted by the Government for low-income lenders.” On the other, that in cases of non-payment “lenders continue to prioritize friendly recovery solutions, which have proven to be more effective.” Therefore, the study concludes that “a large wave of foreclosures is not expected in 2023-2024.”
The patterns for Spain, basically, do not differ much from what is expected in almost all advanced economies. The main difference is that those where the real estate market has shown a greater real estate boom in recent years (in Canada, where prices are already falling, houses have become 50% more expensive) will now be the ones that experience the greatest corrections . Fitch predicts a drop in amounts of up to 10% in Denmark and Australia by 2023; up to 7% in Canada and the United Kingdom; 6% in the Netherlands; and below 5% in the US, Germany and France. In 2024, the group will be divided in two: in European countries prices may continue to fall, while in non-European countries growth will recover.
The mystery of China
A separate case is China. The real estate sector of the Asian giant has been grabbing headlines for months and concentrating fears of a major crisis. This year prices will already fall by 2%, according to Fitch, and they will continue to do so next year (up to 3%) and it is even possible by 2024. However, Fitch analysts expect a “foreseeable orderly resolution of the risks of the sector” . And at the same time they emphasize that “inflation is manageable and interest rates are falling.” This does not exclude multiple risks, such as “missteps” in the management of the pandemic or weak employment performance. Also the possibility that a more intense international recession than expected will undermine its economic growth (expected at 4.1% in 2023, by far the largest among the 15 countries analyzed).
For the eurozone, the US and the UK, Fitch anticipates ongoing or impending recessions. And remember that high prices are the biggest challenge right now, also for the real estate sector. It is a risk that governments run, but in which the banks are also at stake. “The risks of inflation staying high for longer, with interest rate rises sharper than our forecasts predict, and wages deteriorating relative to inflation,” the report authors warn, “could result in higher price correction. And in this scenario, they add, “defaults [de hipoteca] would multiply, particularly in markets where variable lending dominates.”
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