Cash Home Purchases on the Rise as Interest Rate Increases Impact the Market.
Recent interest rate increases are driving cash home purchases in Spain.
According to notaries, in February, only 42.5% of the transactions signed in the country were paid for using a mortgage, the lowest figure in over five years. Specifically, these figures haven’t been seen since the end of 2017. Moreover, it is five percentage points below the historical average that began in 2007 (47.6%).
However, there are significant differences between the autonomous communities. In Catalonia, for example, the purchase of homes with own resources and mortgages remained virtually tied in February, while in Madrid and the Basque Country, operations financed with mortgages still stand out, with more than 60% in both cases. In La Rioja and Navarra, the weight of transactions carried out with mortgages also exceeds the national average. On the other side of the table are the Valencian Community, Murcia, and Castilla-La Mancha, three regions where less than a third of home purchases are financed with a mortgage.
Factors explaining this scenario behind these figures are several factors, although the most notable is the impact that interest rate increases are having on housing demand.
The reason is that the increase in interest rates has expelled a part of housing demand that no longer meets the banks’ risk criteria. This is perfectly visible because the drop in sales transactions is much lower than that of mortgages. In other words, in absolute terms, almost 100% of the drop in sales is due to a lower number of mortgages.
Official figures point in that direction. According to notaries, the signing of new mortgages has accumulated six consecutive months of year-on-year declines in the country as a whole, and in the last three, the decline has been in double digits (in December, the establishment of loans for home purchases fell 18.9%; in January, 14.8%, and in February, 23.5%). In contrast, sales have accumulated five months in negative territory, only two of the last three months have seen a decline of more than 10%, and in February, the decline was 10 points lower than that recorded by mortgages (-13.1%). Thus, in the second month of the year, 7,333 fewer sales were formalized than in February 2022, and 6,657 fewer mortgages.
Iñaki Unsain, a real estate expert and former president of the Spanish Association of Real Estate Personal Shoppers (AEPSI), also attributes the interest rate hikes, which have gone from 0% to close to 4% in less than a year, to the fact that “many people now do not have enough solvency to buy and pay mortgage installments. That’s why the number of transactions with mortgage loans has dropped dramatically.” He adds that “it also influences that during last year, many hurried purchases were accumulated to take advantage of the low-interest rates.”
Currently, the Euribor is near 3.7% in the monthly rate, the highest since the end of 2008, which is causing a significant increase in the cost of variable-rate mortgage installments. Meanwhile, most fixed-rate mortgages now marketed by banks have an interest rate above 3%, according to idealista/mortgages comparison, which has reduced some of their appeal to consumers. In the case of mixed mortgages (which include an initial fixed-rate period that later converts to a variable rate and has become a popular alternative for many families), most offers are above 2% in the fixed-rate period.
Regarding foreign buyers, it is worth noting that the volume of home purchases in Spain is at an all-time high. According to Property Registrars, in 2022, 13.75% of all transactions were led by a foreign buyer, the highest figure in the historical series. It was also a record year in absolute terms, with 88,858 transactions.
Foreigners are one of the profiles where this trend is most evident, especially for foreigners relocating to our country – specifically those coming from South America or China – bringing their money and easily buying in cash. We need to highlight as well the case of second home buyers, usually on the coast or in the mountains, who have enough savings to buy without needing to go into debt at these high-interest rates we are seeing. Another profile highlighted by the real estate agency network is buyers who supplement the required financing with loans from close family members such as grandparents, siblings, or uncles, as well as through lifetime donations from their parents, and thus do not need a mortgage loan.
Article by Dust & Sand Luxury Homes