A year of uncertainty in real estate

I am not at all a fan of making economic forecasts, especially in the current conditions. context of very high geopolitical uncertainty. Before I started writing this article, I had the courage to go and look at what I said on these pages last year.as at present, about the development of the sector in 2023. The owner was What to expect from real estate: fewer purchases, stable price. This inspired me. Although we do not have exact data The year will end with a decline in sales of 12–15% and price stabilization or slight growth.

All in all Macroeconomic forecasts for 2023 were not very accurate. The economy was expected to slow quickly due to the impact of interest rates, loss of purchasing power caused by inflation and geopolitical issues. However, The global economy, and especially the most developed economies, has performed much better than expected.. Example. At the end of 2022, the US economy was predicted to enter a recession. while the Blue Chip Economic Forecast consensus is -0.1%. The same forecast for the end of 2023 was 2.3%. It was also expected that inflation has been very stable, after at the previous stage it was believed that inflation would be temporary. But the reality is that inflation has slowed quickly. Finally, central banks stated that rates will remain high for quite some time. However, markets are benefiting because they are betting that intervention rates will fall as early as 2024. This forecast is already reflected in rates have fallen in recent weeks. The yield curve remains inverted (short-term assets yielding more than long-term assets), which in the past was a clear sign of recession, but Today it seems like yet another economic pattern that has become part of history.

The housing market also remained remarkably resilient in 2023.With recovery of prices in some countries that showed a clear correction at the end of 2022 – beginning of 2023, as in Australia or the USA. In the EU, the cyclical situation is different: house prices went from rising by 10.4% in the first quarter of 2022 to falling by 1% in the third quarter of 2023.. The decline is intense in those countries where it increased significantly in the previous expansion phase (Luxembourg -13.6%, Germany -10.1%, Sweden -4.2% or Finland -7%). In any case, the fall is a far cry from the forecasts of the European Central Bank, which calculated that for every point increase in interest rates, house prices fell by 5%. The case of Spain is special because, unlike most EU countries, there was no significant increase in house prices during the pandemic and in subsequent years. That’s why, The adjustment should be slower and more moderate, as it actually is.. In fact, in recent quarters there has been Acceleration of home prices despite significant declines in sales and mortgage originations consequence of rising interest rates.

Logically The evolution of the real estate sector in 2024 will critically depend on the development of current geopolitical conflicts. For example, expectations of a rapid decline in inflation could be affected by the diversion of shipping from Asia to Suez Canal. This will make central banks more reluctant to cut policy rates and put renewed pressure on mortgage rates.

Without geopolitical turmoil, the Spanish economy is expected to gain strength through 2024, with growth forecast between 1.5% and 1.8%. If job creation continues, there will be some improvement in sales and mortgage lending. as a consequence of the end of the 2022 base effect (a year in which sales rose significantly due to stagnation during the pandemic years and an attempt to take advantage of the latest blows from low interest rates), and reduction in interest rates, which in the last weeks of the year is already switching to mortgage offers. It means that Financial institutions will try to maintain results amid falling rates by increasing mortgage production. The evolution of house prices is more uncertain since the recent acceleration will not be sustained given the overall economic slowdown, and inconsistency between offer (about 100,000 new homes annually) and demand (annual education of 210,000 families) will make it difficult to make significant price adjustmentsat least in big cities where the tension is greater.

In turn, rental costs continue to rise.. In the EU, annual growth is 3%. In Spain, growth continues to be strong and could reach 5% by the end of 2023. He the preemptive effect of the potential application of the Housing Act rent cap may partly explain the high rates of price growth in some cities. It doesn’t look like the pressure on rental prices in Spanish cities will ease in 2024, given the clear supply shortage.. Both portals and real estate brokers continue to see a significant reduction in supply. A recent study by the Barcelona Real Estate Chamber shows that rental supply has fallen by 60% in the last 5 years, according to advertisements on major property portals. In this situation of high demand and insufficient supply, rental prices in major cities will find it very difficult to stop rising unless there is an economic downturn much larger than expected., and this affects employment. Come on, how to choose between bad and worse.

Jose Garcia Montalvo | Professor of Economics at UPF