With the rise in interest rates internationally over the past year and a half, there has been a lot of hand-wringing – reasonably so – about its effects on the housing market.
There are countries where a drop in sales and prices is underway in significant part due to the interest hikes. In the UK, for instance, interest rates have rocketed in less than two years from 0.1% to 5.25%. As a result, sales are slumping, with a 20% drop in house closings compared to 2019, the last “normal” year before the pandemic rollercoaster. This fall in sales has led to a 5.3% drop in prices in August compared to the year before.
Sweden, if anything, faces an even more dramatic contraction in housing prices, having seen a 12% decline since the start of 2022. Some analysts predict that prices will decline by 20% before the market hits bottom.
However, this process of “correction” is not spread evenly across countries and not even within countries. It’s worth looking at why to understand why Costa del Sol, Malaga province, and much of Andalusia continue to defy gravity.
Let’s start with the USA, which is a huge market. During the pandemic, demand for homes with bigger yards and home offices (because of remote working) skyrocketed. This led to a 40% increase in average home prices.
Coming out of the pandemic, the Fed – the USA’s central bank – doubled interest rates from 3-6%. 30-year fixed rates reached an eye-watering 7.23% in August. That put the brakes on the dramatic price rises during the pandemic, as you can see from the below chart from the Federal Reserve Bank of St. Louis. The sharp drop takes us to April of this year.
Forbes published a detailed analysis of the US housing market at the start of September. They noted that the US housing market is experiencing a series of contradictory pressures. On the one hand, over 90% of existing homeowners have locked-in 30-year mortgage rates at 3% or even lower.
That’s a good and a bad thing as far as the market is concerned. In the 2000s, in the lead-up to the housing market meltdown, more than 30% of US mortgages were variable rate. The move to fixed-rate mortgages reduced the danger of the same kind of collapse recurring. However, it also leads to what’s called a “lock-in effect” that creates its own problems. Basically, existing homeowners don’t want to sell their house when it means a doubling of the interest that they would have to pay on a replacement home.
Meanwhile, in the new home market, builders are anxious because of higher interest rates leading to tighter borrowing conditions. This is combined with a labour shortage in the construction sector, leading to higher wages. The result is a big tightening of supply. And that is leading to prices rising again even as home sales fall. New house rises have risen since April from their lows of $417,000 to almost $437,000 in July. That’s a 5% increase in just two or three months.
In the UK and Sweden, in contrast, there is no such thing as a 30-year fixed mortgage. That means that every few years, mortgage holders must renegotiate. Then, they are subject to the new rates, good or bad. According to a recent article in The Economist the results are grim.
“By the end of 2026, 2m of them will have faced a rise in annual mortgage payments of more than £3,600 ($4,570)—over 10% of median household income. The situation is similar in Sweden, where almost 90% of loans have a fixed-rate period of two years or less. In New Zealand, interest costs alone could soon exceed a fifth of borrowing households’ disposable income.”
The same article points to Denmark as a solution that eliminates the excess instability in the UK and Swedish models while eliminating the rigidity of the American model. On the one hand, over half of Danes also lock into a 30-year mortgage, but:
“…a seller can end a mortgage by buying it back at its market value, which falls when rates rise, thereby cashing out the value of their interest-rate fix. Alternatively, they can transfer their mortgage to the home’s new owners. The result is greater dynamism: in the first quarter of 2023, housing transactions were down by only 6% on a year earlier, compared with 22% for existing homes in America.”
There is a similar, but more virtuous, circle at work in the Costa del Sol. It has to do with the character of home purchases in coastal Andalusia and the Costa del Sol in particular.
Spain, like many other countries, is facing an uneven housing market. Inland properties, aside from major cities like Madrid, are facing a “price correction” because of the high-interest policies being pursued. Those areas of the country are dominated by local buyers and sellers purchasing principal homes. The Costa del Sol, on the other hand, is both heavily foreign and heavily inclined towards second holiday homes.
According to a study in La Opinion de Malaga, the percentage of foreign buyers of new build homes on the Costa account for 75% of all purchases. Of those purchasing a new build property, a whopping 77% were buying second homes. In terms of total sales, the number of second homes purchased in Costa del Sol is quadruple the national average.
And while the number of foreign buyers in Spain declined by 5% compared to the year before, that year was off the charts with post-pandemic pent-up demand. That means that this year’s foreign home sales numbers remain historically high. This continues a trend that began some time ago.
What does this mean? There are similar pressures at work as in the USA – for instance, greater demand than supply, exacerbated by the lock-in effect. But there are also significant differences that will help the Costa del Sol market remain more stable. For one, Costa del Sol is a destination for tourism, which makes properties attractive as locations for investment.
Secondly, the large number of foreign buyers of second homes. Some second home buyers are affected by interest rate hikes, but buying a second home generally reflects a stronger financial position. That applies to both foreign and domestic second-home buyers. Some of those buyers, especially from the UK, needing or choosing to take a mortgage in Spain will also find more attractive rates and packages in Spain than in their home country.
What’s more, Malaga province is the fastest-growing province in peninsular Spain. The number of new arrivals is at a rate higher than new homes being built. This will continue to create an upward pressure on house prices. This demand, combined with a general lack of housing stock (I know of several apartment developments, for example, where this is less than 2% of inventory on the market), continues the upward price trend.
And, finally, while house prices can seem high in places like Marbella – especially some of the glamorous monster mansions for which Marbella is famous – it remains a cheap option compared to other parts of Europe and the United States. Moreover, in general terms, prices in Spain, including the Costa del Sol, are still below their peak in 2006 by quite an amount.
These factors, I believe, will continue to support the local and provincial real estate market through the current period of global uncertainty because of interest rate hikes. What’s more, it is unlikely that there will be more than one more rate hike. The majority of money market analysts are even betting that the hikes are over.
View full article in Terra Meridiana