There will NOT be a crisis in Spain

Real-estate analyst and consultant Gonzalo Bernardos, professor of economics at the University of Barcelona and head of the Department of Audit, Accounting and Real-Estate Promotion, has shared his view on how 2022 will end for Spain’s property sector and for the country’s economy as a whole.

Will there be an economic downturn in Spain in the coming months?

In the second quarter of 2022, the euro area is very likely to record a fall in GDP. Rising electricity prices, energy restrictions and a global decline in demand will have a significant impact on all countries. However, the effect will be stronger in Germany, Italy, Austria and the Netherlands.

During this period Spain will experience an economic slowdown and GDP growth will be modest, but the country will avoid a full recession thanks to its relatively low level of industrial production and an excellent tourist season. In addition, for the ECB’s interest-rate hikes to have their full economic effect, around six months need to pass.

How will the new situation affect an average Spanish family?

A huge number of households are already finding it hard to cope. At the moment this is not due to job losses — employment has actually increased between January and August — but to high inflation. In the euro area, last month’s inflation was driven by the rise in energy and food prices. In Spain, the main consequence of rising prices has been a loss of 5.9% of households’ purchasing power, forcing many families to tighten their belts.

Over the coming months, most people will have to continue adjusting their spending. The three main reasons will be: a further loss of purchasing power, job cuts and a high degree of uncertainty. Many families, even if they do not strictly need to, will reduce their expenditure in an attempt to save “for a rainy day”, out of fear of what is happening in the world and what might still happen.

In the near future, the main problems of the economy will gradually change. Inflation will ease step by step, as a result of falling commodity prices, new measures from Brussels to regulate electricity prices, higher ECB interest rates and the existing recession in the world’s leading economies. In contrast, unemployment will rise as global economic activity slows.

Will the new crisis be similar to the 2008 crisis?

That depends on the country. For Germany, the situation will be worse, as it will enter a structural crisis. It will no longer have access to very cheap energy (natural gas), and its export capacity will fall sharply, whether for political reasons (Russia) or economic ones (China). Germany’s powerful industrial sector will face a very tough period.

Spain, on the other hand, will not experience that kind of crisis. We are more likely to see a mild recession. In the worst case, the new situation will resemble 1993 (a 1% fall in GDP) rather than 2008, when GDP dropped by 13% and output shrank by 7.7%. In this sense, Europe’s main problem is that its most economically advanced country, Germany, is facing a deeper crisis than Spain.

How will higher interest rates affect the Spanish property market?

Most real-estate downturns are caused by a rapid and significant rise in interest rates. If this is combined with an oversupply of property and an excessive volume of credit granted by banks in previous years, a major property crisis is to be expected. However, the current situation in Spain’s housing market is different: the best opportunities have already been snapped up, the pace of construction has slowed because of rising costs and economic uncertainty, and this year we are seeing sharp price increases across all regions together with a significant reduction in supply.

In the coming months, if the ECB’s forecast is met, its main interest rate will stand somewhere between 2% and 3%. In the first scenario, the number of transactions would fall by around 8% and prices by 2%; in the second, by 13% and 4% respectively. In any case, next year will be worse than the current one, in which house prices in many parts of Spain have already exceeded their previous historical highs.

Is a downturn expected in Spain’s new-build market?

To a much lesser extent than in the resale market. There are two major differences between the two. Firstly, the supply of new-build homes is scarce, whereas the supply of existing homes is abundant. Secondly, many new properties scheduled for completion in 2023 have already been reserved by buyers. In the resale segment, the situation is quite the opposite.

At present, there are quite a few developers who already have guaranteed payment for more than 60% of the homes they will deliver over the next year. Finally, economic downturns tend to affect buyers of new-build homes much less, as they usually have higher incomes than buyers in the resale market.

Will higher interest rates drive investors away from residential property?

Without a doubt. For a long time, deposit rates in Spain were negative. In the near future, fixed-income products and time deposits will become an attractive alternative to property for more conservative investors. This will reverse the trend we have seen in recent years. At the same time, one of the main effects will be the withdrawal of some investment funds from the property market and a reduction in the amount invested by others.

However, commercial real estate will suffer the most. Higher interest rates will have a strong negative impact on the valuation of offices, court buildings, shopping centres and hotels. In addition, most funds will have far fewer resources to invest: on the one hand because investors are withdrawing, and on the other because the volume of investment capital is shrinking. It looks very much as if the boom period for Spain’s commercial property market is coming to an end.

What should you do to succeed in these new times?

In any industry — and real estate in Spain is no exception — a wise move in difficult times is to invest in your skills and training, as this allows you to take advantage of more opportunities and serve your clients better. During a crisis, jobs are lost, but the professionals who are made redundant look for new positions, which creates an opportunity for businesses to attract qualified staff. Use this challenging period to move your career forward.