Why Spain – Why now: A Property Market Overview

Based on the latest facts and figures and despite Spain’s downturn, the country has managed to bounce back out of the economic crisis, managing to exceed its pre-crisis level of gross domestic product. Nine years after Spain slid into a long and bitter recession, the country is back where it was in 2008.

After three years of impressive economic growth, Spain is about to pass a crucial milestone on the road to recovery. Nine years after sliding into a long and bitter recession, the country is now on track to exceed its pre-crisis level of gross domestic product.

Arguably the seeds of Spain’s economic downturn were sowed during the years of artificially low-interest rates that followed the launch of the European single currency in 1999.  A country with a history of high inflation and high-interest rates was suddenly able to borrow at dramatically reduced rates on financial markets. That fall in the cost of money sparked a credit as well as a property boom that led to excessive borrowing, record housing starts and inflated real estate prices. As a result of the high leverage that built up across the economy, the country was left vulnerable to effects of the global financial crisis of 2008-09. The construction, real estate as well as the banking sector were rocked to the core by the twin collapse in credit and property prices.

The correction that ensued has done away with significant economic imbalances accumulated over the boom period. The banking sector has consolidated, the record external account deficit has been reduced and the contribution of residential construction as a percentage of GDP has fallen from a peak of above 12% in 2008, to 4% of the economy in 20131.

Spain finally emerged from this severe recession in 2014 and since then its economy has been outperforming its European peers, growing at 3.2% in 2016.  Sustained economic growth and an initial reform of the rigid labour market have led to a significant reduction in unemployment, which has fallen by 9.7% (CAGR) from the heights it reached in 20132.

Real GDP Growth (%)

Source: OECD, Economic Outlook, March 2017

Unemployment Rates (%)

Source: OECD, Economic Outlook, March 2017

The real estate bust led to a substantial stock of unsold new dwellings which, combined with a lack of availability of mortgage financing, contributed to a sharp fall in property prices. Since 2014, however, the Spanish residential real estate market has seen increases in average selling prices.

House Prices (Annual %)

Source: OECD, Economic Outlook, March 2017

Even though Madrid and Barcelona have also seen a spike in investors’ interest in property, both capital cities remain affordable compared to their Western European peers3.

Average size of new dwelling for EUR 200,000

Source: Deloitte

Total housing transaction have also been on the rise since their low point in 2013. Existing housing stock has made up the bulk of transactions, though new housing starts enjoyed 70% annual increase in 2016, to approximately 85,000 units.

Total Housing Transactions – Value (LHS) and Volume (RHS)

Source: INE

The transaction price per square metre of new dwellings in Spain has risen since 2014 but remains attractive relative to all Western European markets bar Portugal.

Average transaction price of new dwelling (EUR/m2)

Source: INE, Deloitte

In terms of regional performance, Madrid, Barcelona as well as the coastal markets of Southern Spain have seen the greatest concentration of activity in terms of total property transactions4.

Property transaction by provinces in the first half of 2016

Source: INE, Deloitte

Investors interest spikes in Spain

In spite of improved activity levels and higher property prices, the residential real estate cycle remains attractive, especially when compared to the majority of other European markets. House prices in Madrid and Barcelona remain cheap relative to their cyclical peaks, providing investors with capital growth opportunities5.

The improvement in underlying economic performance has brought Spain back on the radar screen of international investors. Property investment has especially benefited from this reversal of trend, with the residential property market the beneficiary of significant inflows of foreign as well as domestic funds6. In 2016, the main focus of investor interest were Madrid and Barcelona.

In addition to the cyclical improvement, the real estate market has also enjoyed structural improvements. The arrival of several international institutional investors that have purchased local property developers has injected capital as well as new level of professionalism into the sector.





4 JJL, Residential Report, November 2016, page 30

5 JJL, Residential Report, November 2016, page 43

6 JJL, Real Estate Investment Market Report, March 2017

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