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The impact of the pandemic on the housing market in Spain

The COVID pandemic hit just as the housing market cycle was in a maturing phase. Several indicators showed a slowdown in the market after the expansionary period that began in 2014. The measures adopted by the Spanish authorities to combat the health crisis projected that, in the first months, the activity of the real estate market would drop sharply. However, beginning in the summer, with the partial lifting of restrictions, activity began to recover. This with an evolution conditioned by the development of the pandemic.

The health crisis has established a change in preferences regarding the type of housing demanded. A trend towards larger homes in their outdoor spaces has been established. Despite the intense contraction in economic activity, house prices have not shown, for the time being, general falls. This in comparison with the one they had in the years prior to the 2008 crisis.

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With regard to financing conditions, the action of the European Central Bank, both on a monetary and financial scale, has contributed to the decrease in the average interest rates applied to new loans for home purchase. Despite this, there are signs of a certain tightening of the approval criteria and of some conditions applied to the loans.

How has the recent behavior of the housing sector and prices been after the pandemic?

In the housing market, activity was affected by the outbreak of the health crisis, at a time when it was showing signs of exhaustion, as evidenced by the slight drop in sales, the notable slowdown in property starts and a slowdown moderate price growth throughout 2019. On the supply side, the most representative indicators of the sector fell sharply in the second quarter of 2020. This was due to the suspension of non-essential activities decreed by the Government at the end of March .

With the de-escalation, the works paralyzed during the confinement of the spring of 2020 were restarted. This translated into a strong rebound in the indicators at the end of the second quarter and during the third. In the case of affiliation, the building sector was less affected by the effect of the COVID-19 pandemic. This is reflected by the lower incidence of temporary employment regulation files (ERTE) in this branch.

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The supply indicators showed a loss of dynamism at the end of last year and a prolongation of residential construction activity at the beginning of 2021. This as a consequence of the new adverse developments related to the pandemic and its impact on the demand for new construction In 2020 as a whole, the number of visas fell by 20% compared to 2019. Therefore, an even lower number of completed homes was anticipated for the next two years.

From the point of view of demand, sales also suffered the initial impact of COVID-19. This is due to restrictions on mobility and social distancing measures. A large part of the operations were postponed and materialized in the final stretch of the second quarter and during the third. In effect, with the gradual lifting of restrictions in May, trading was reactivated and began a gradual recovery.

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Thus, in 2020 as a whole, the volume of transactions was 18% below that of 2019. Throughout the current year, until February, the number of purchases and sales is lower than that registered in the analogous period of the previous year. Recent developments continue to be conditioned by the continuation of some limitations on activity, such as the worsening of their prospects on the labor market and their access to financing.

In terms of investment in housing, the impact of the pandemic is being similar to that experienced by sales or new construction permits, with a drop in 2020 close to 17%. This decline is greater than that recorded by other components of investment. Which suggests that investment in housing would have been more affected by the uncertainty about the pandemic.

Has there been an increase in home sales transactions in the last months of the pandemic?

The subsequent recovery in sales has been more intense in new housing. This has been particularly so during the past summer. Mainly because these operations are the result of planned decisions long before the pandemic arrived. The materialization of these agreements was postponed until the lifting of mobility restrictions. The incipient changes in demand towards larger homes with exterior spaces could also have contributed to the greater dynamism of new housing.

Since the outbreak of the health crisis, there has been an increase in the percentage of purchases of single-family homes and an increase in the average surface area of ​​the home. This has reached historical maximums in almost all types of housing and in a generalized way by region. The deterioration of job prospects as a result of the pandemic would also have induced changes in the composition of buyers towards applicants of somewhat higher age and socioeconomic status.

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The pandemic has also been able to accelerate some previous trend in housing demand. This is its reorientation from the most populated municipalities to others with lower population density. This development was already conditioned by a greater scarcity in the supply of new housing and a higher average price in the big cities. However, it has been exacerbated by new demand preferences towards open and larger spaces.

According to the registry information, this evolution is generalized by region. More than 80% of the provincial capitals reduced their weight throughout 2020 in the total sales of the province. By nationality of the buyer, acquisitions by foreign citizens show greater weakness than purchases by nationals. This is due to the greater restrictions on the international movement of people. No differential impact of the pandemic is observed among foreign nationalities.

For the moment, in this crisis the adjustment of house prices is not being as intense as in the global financial crisis. This is due, among other factors, to less oversizing of the real estate sector, less indebtedness of the agents involved and more rigorous credit granting criteria than in those years.

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The price of new housing is almost 10% below its maximum level reached in 2007. However, the information from the public deeds corresponding to recent months points to a possible exhaustion of this acceleration in housing prices new. Although the slowdown in prices is generalized by region, the loss of dynamism is greater in areas of the Mediterranean coast and on the islands. Places that have traditionally presented a higher percentage of sales by foreign citizens due to their greater tourist attraction.

What has been the effect of the pandemic on the development of the rental market?

In the rental market, prices have fallen in some areas, reversing their upward trajectory of previous years. According to information from the main real estate portals until March, rental prices were falling with some intensity in Catalonia, the Community of Madrid and the archipelagos, while in the rest of the regions the trend is towards a progressive slowdown or stabilization. The loss of dynamism in rental prices is greater in some of the larger cities, due to both the increase in supply and the decrease in demand.

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The decline in rental demand is due to several factors. On the one hand, that coming from students would have been hampered as a result of restrictions on mobility and the increase in distance education. On the other hand, there has been a shift in demand towards other less populated municipalities with lower price levels.

Another possible explanation for this decline is the weakening of rental prices. This with implications for the entire national territory, due to the worsening of the labor market. Especially among young people and temporary workers, who are more likely to demand rental housing.

How has the recent evolution of housing credit and financing conditions been after the pandemic?

The economic measures taken in response to the pandemic have contributed to the fact that the financing conditions of the loans for the purchase of a house have remained loose in general terms. Thus, the more expansive tone of monetary policy has translated into a drop in market interest rates. Also in maintaining the financing costs of financial institutions. This while the temporary relaxation of capital and operating requirements has helped support the flow of credit.

In this context, the synthetic interest rate applied to new mortgage loans has been reduced by nearly 30 basic points (bp). This from the beginning of the health crisis, to 1.5% in March 2021, which is the historical minimum. This decrease has been close to 35 bp in fixed-rate and mixed mortgages, while it has been 25 bp in variable-rate mortgages.

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In the case of the latter, the entities fully transferred the falls recorded in market interest rates to the cost of the loans. In fixed rate and mixed mortgages, the decrease in the cost of loans was the result of the reduction in the margin applied by the entities.

Another relevant aspect of the financing conditions is the average loan repayment term. In the case of variable-rate mortgages, it has remained slightly above 26 years. There have been no changes with respect to the evolution of recent years. However, in fixed-rate mortgages, during 2020 the average amortization period has continued to increase, up to 25 and a half years, thus continuing with the previous trend.

For its part, the average ratio between the value of the loan and the transfer amount of the home [the loan-price ratio (RPR)] has remained stable during 2020, standing at around 79% at the end of the year. The proportion of riskier loans in new business has continued to decline in recent quarters. This is in line with the trend of recent years, which shows the most prudent attitude on the part of lenders.

According to the Survey on Bank Loans (EPB), the criteria for loan approval would have been tightened after the outbreak of the health crisis. This as a result of an increase in the risks perceived by financial entities. The demand for credit had already been showing some weakness before the arrival of COVID-19. This is in line with the maturity of the expansive cycle of the housing market, as indicated by the EPB.

As occurred with transactions, the imposed mobility restrictions generated a collapse in credit demand in the second quarter. However, with the lifting of restrictions starting in the summer, it grew again in the third quarter. In part, as a result of the materialization of purchase decisions that had to be postponed.

This behavior translated into a sharp drop in new loan operations for home purchase during the spring of 2020. Then there was a rebound in the summer and, in the most recent months, which registered a growth rate higher than that observed. before the pandemic.

As a result, the year-on-year rate of decline in the balance of credit to this segment intensified during the spring of 2020. In June it contracted at a year-on-year rate of 1.9% (a level not seen since mid-2018). Since then, the fall began to moderate, standing at 0.6% in March 2021. This is 0.4 pp less than before the outbreak of the pandemic.

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