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Another RE Bubble? S&P Forecast House Price Rises Until 2020

3 August 2017 – Cinco Días

After years of crisis, the Spanish real estate market is now growing again year after year. That is according to analysis prepared by Standard & Poor’s, which estimates that house prices will rise by 4% in 2017 and by 4.5% in 2018, with respect to the previous year.

The report also forecasts a reduction in inflation. Currently, prices are rising at 1.5% p.a. but that figure is expected to decrease to 1.3% in 2018. Moreover, economic growth in Spain is expected to lead to a reduction in unemployment, down to 15.7%. And that percentage is forecast to fall to 13.6% by 2020.

Despite the positive outlook, the risk measurement entity warns of the risk that Brexit, the United Kingdom’s exit from the European Union, could have, given that currently, Brits account for 19% of foreign house buyers in Spain.

House sales are growing to both domestic and international buyers. In 2016, the total volume of transactions rose by 13.7% to reach 404,000 homes sold in Spain. During the 12 months to April 2017, 416,000 homes were sold, up by 11.8%.

Sales to foreigners grew by 13.8% in 2016. In total, 53,500 of the 404,000 homes purchased were transferred into foreign hands. The main buyers were British, who accounted for 19% of purchases by foreigners; followed by the French (8.05%) and Germans (7.69%). Moreover, the report points out that the so-called golden visas, which grant residence permits to those foreigners who invest more than €500,000 in real estate, excluding taxes, have led to an increase in acquisitions by Russian and Asian citizens.

Standard & Poor’s also expects that the European market will continue to grow. The ratings agency forecasts that house prices will rise in many of the neighbouring countries, such as Germany, where they are expected to increase by 6% next year. Nevertheless, in the main countries that the buyers in Spain come from, in other words, the United Kingdom and France, prices are expected to decrease by 1% or remain stable, respectively.

This growth in sales has meant that house prices have not slowed down. According to the real estate appraisal company Tinsa, house prices rose by 3% during the second quarter of 2017 compared to June last year. Currently, according to the same firm, the average price of homes per square metre in June 2017 amounted to €1,245/m2, well below the peaks of 2007 (€2,047.69/m2).

Sources at Standard & Poor’s expect that the Spanish economy will continue to grow in 2017, by 3% for the third consecutive year. The creation of 2 million jobs since 2013 and the increase in exports are the main drivers of confidence that the firm is using to justify the rise in house prices, although it also warns of the need that Spain has to reduce its deficit, which is one of the highest in the Eurozone.

Ultimately, economic growth will be reflected in real estate growth over the next three years. The slow reduction in the stock of housing accumulated during the years of the bubble and the slow, albeit inexorable, rise in interest rates (the first rise is expected to happen in 2019) will limit the rise in house prices. Standard & Poor’s also questions the effect of Brexit on the real estate market.

Original story: Cinco Días (by Fernando Cardona and Eduardo García)

Translation: Carmel Drake