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The effect of 2020 on the real estate market

When our clients consider buying or renting their apartment, they ask us quite often what we believe the evolution of the real estate market will be, mainly in Madrid. Last year was especially unusual and this became a major question among home buyers and owners. Truth be told, with the economic situation caused by the pandemic, the state of alarm stablished by the Government expected to last until mid-May 2021, the lack of foreign clients investing in the city (not to mention many other external factors that can have a direct impact on the real estate market such as the economic recession, ERTES, unemployment or mobility restrictions) the answer is not easy at all. For this reason, now that the year is over, we wanted to gather different points of view and predictions of all kinds, made throughout 2020 by different real estate experts and check, with the wide range of opinions, how tough it is to make accurate predictions, specially about the future.


At the end of 2019, Pedro Soria, Tinsa's commercial director, declared to Cinco Días newspaper “We forecast for 2020 that the average growth in RE prices will continue to slow down and end around 3%. Some growth will occur in new development sales and we will see an increase in the constitution of new mortgages, although always within a moderate situation, between 3% and 5% year-on-year. Regarding the new development activity, it will increase slightly compared to 2019 and could end in figures around 5%”.

Since the beginning of the year, in the article How the housing market will behave in 2020 that appeared the 8th of January in Expansion, "the experts forecast that RE prices will increase around 3%" and they specified that prices would move in a range of 2% to 5% depending on the location of the property. The same opinion was expressed in the article Houses put on the brakes in 2020 in El País where real estate experts predicted RE prices to rise from 2% to 5% for the year, marked by sustainability, the behavior of the rental market and the policies the new Government could propose.



In the first quarter of 2020, the real estate portal Pisos.com considered that house sale prices would rise between 2% and 4% while rental prices could grow even more, between 4% and 6%. Fotocasa real estate portal was already more conservative in its forecasts and pointed out that sale price would rise on average between 1% and 2%, and rental prices by around 2.5%.


At the end of March, the report prepared by the Real Estate Business School and the University of Malaga was not very encouraging and forecasted a 46.8% decrease in new-build housing sales with an average 16.7 % drop in prices. The drop in second-hand housing sales was more moderate with a decrease of 37.4% and price falls around 18.4%. The report also estimated that building permits and the number of visas could be reduced by a third compared to the previous year.

In the interview carried out in the newspaper Expansión on May 2nd, Samuel Población, National Director of Residential and Land at CBRE Spain, was optimistic about the real estate market situation and declared “we will observe discounts on second-hand property due to the owner’s particular situations, but in new development projects, backed by large companies, prices do not need to be adjusted”. For him, the COVID-19 crisis was not going to have a general impact on the residential real estate market, but a rather limited effect on specific cases in a most exposed economy. His opinion differed from that of other experts for whom the recovery in demand would depend mainly on the evolution of the job market and international tourism within the next upcoming months.


An article in El País of May 15th, referred to the report prepared by the US rating agency Standard & Poor’s on the evolution of property prices in the main European markets, with a forecast for 2020 for Spain of a decrease of 3.2%.

The Real Estate sector report for the second half of 2020 prepared by CaixaBank Research, considered that the global economic crisis caused by COVID-19 would have a strong impact on the job market and consequently, on the demand for properties. They expected RE sales could fall 30% to 40% in 2020. They also considered that, due to uncertainty, the start of new building projects could slow down and that new construction visas could be reduced 20% to 40% in 2020, that is, between 65,000 and 85,000 new construction visas. This decrease in demand would affect house prices, which could fall 6% to 9% during the 2020-2021 biennium in the whole of Spain.

Housing sale activity could be down 30% or even 40% in 2020. They also considered that, due to the uncertainty, new building projects could slow down and that new construction visas could be reduced by 20% to 40% in 2020, which means, between 65,000 and 85,000 new construction visas. This decrease in demand would affect the price of properties, which could drop 6% to 9% during the 2020-2021 biennium in the whole of Spain.


The same report stated that the drop in prices would be foreseeably higher in the second-hand market, which represents the bulk of transactions (more than 80% in 2019), since it is usually more sensitive to the economic cycle. Since the offer is scarcer in the new development construction sector, prices would experience a minor decline in relative terms.


The opinion of Euroval, an appraisal company active on the Spanish market was that RE prices would fall by 2.84%, at the end of 2020 in the whole of Spain.

Several reports and forecasts agree that tourist areas and second-hand housing would be the ones that would suffer the most from price drops since the number of foreigners investing in Spain would be considerably reduced. This segment represented 12.5% ​​of total sales transactions carried out in 2019.


2021 FORECASTS


The behavior of the real estate sector in 2021 will be closely linked to a series of factors, which range from how the Spanish economy recovers as well as that of other European countries to how the health pandemic evolves, when the COVID-19 vaccines will be available to a large share of the population and when mobility restrictions are no longer needed. According to the CaixaBank Research report, the forecast is that prices will begin to register positive rates in the second half of 2021, but pre-crisis level will not be reached before 2024.


Standard & Poor’s has conducted an analysis of the residential market and the evolution of property prices in the main European markets for 2021. The results show that the Spanish RE market will see a faster recovery and will lead the increases by 1.5%, although the value of houses will continue to fall in other countries such as France or Germany. The results also show that the trend will be further accentuated in 2022 with price increases of 5% and 3.3% in 2023. nFor Euroval, there will be a gradual drop of prices for new housing compared to the second-hand market, in their point of view this will occur in a sustained way until 2023: 3% in 2020, 5% in 2021 and 5% in 2022".


Gesvalt, another appraisal company, forecasts a possible rebound effect on housing demand in 2021 driven by the Euribor rates that have been in negative values since 2015. They also point out that it is very likely that there will be a drop in the number of certifications and visas for new construction; at least during the second and probably third quarter of 2021. Another terminology heard among experts was whether there would be a hoped-for V-shape recovery or whether a U-shaped renewal looks more realistic. The initial perspectives of the most optimistic predicted a recovery of the real estate market in a V-shape gave way to those who believed that it would be a U-shaped and that the market would not return to pre-crisis levels until 2022. For example, in the newspaper el Confidential of June it said, “the real estate sector foresees that the economic recovery will follow a U-shape and once again reach a rate of sales at throughout 2021 of at least 80% or 90% of the 2019 levels.” According to Lola Alcover, Secretary General of the General Council of the Official Associations of Real Estate Agents of Spain, “there will be a drop in property prices of 10 to 15% on average, with 20% drops in some more disadvantaged areas and less than 10% in other more prosperous ones”.


TRENDS


Months of lockdown and the widespread need of working from home have triggered changes in the preferences of many buyers and tenants.


The possibility of reducing weekly trips to the office has opened new options for many families who have broaden their search horizon and are now considering living further away from the city centers. Locations on the outskirts began to gain weight in their preferences, something unthinkable before COVID-19. In these areas, the price per square meter is more affordable than in city centers and they also allow access to larger homes, terraces, garden spaces or shared common areas, like swimming pool or tennis courts. One effect, for example is that the demand for detached houses has skyrocketed as a result of the pandemic, with sales at record-high levels, according to the Notary General Council. With lockdown families have realized they need an extra bedroom or two to use as working space so the number of buyers looking for larger houses has increased.


According to Bankinter: other consequences of COVID-19 is that potential home buyers want to keep on hold or delay between 6 months to a year their property buying decision. Also, part of the demand could disappear for a longer period of time, provoking a temporary imbalance in supply and demand. According to forecasts, this could lead to a price drop of 6% in 2020, that will later stabilize again in 2021.


In the real estate analysis carried out on October 8 by Bankinter, the forecast for 2021 is that the sector should start to recover, but that the pre-covid level of real estate activity would not be reached until 2022 when 500,000 transactions per year may be seen again. Concerning price behavior, they estimate a drop of 4% in 2020 and 5% in 2021 and mention that these drops could take place specially in the prime areas of large cities. The analysis also reflects the increased interest for properties in the outskirts of large cities and a decrease in preference for more central locations.


Although all real estate experts forecast a drop in property prices or to a stabilization, most don’t agree on how much prices can fall this year and the next. While some RE price forecasts for 2021 and 2022 point to small or moderate declines, others consider much bigger price variations.


Thus, the pre-pandemic property price forecasts made by most experts suggested that new developments would continue to grow, though slower than in previous years. In addition, this growth would take place especially in province capital cities where the growth during 2019 was not so high or in traditional markets with a strong demand.

Industry experts during 2020 agreed in forecasting home-price drops, but their opinions varied when it came to quantifying those drops in the coming years. While some see moderate price fluctuations others foresee drops of up to 9%.


Now that we have a clearer perspective of what really happened in 2020, we can see the information from Tinsa’s last IMIE Local Markets report. Prices have dropped throughout Spain, Madrid being the city where this tendency has been stronger with price adjustments of 6,7% since March and 6,3% in the interannual rate. If we continue seeking more opinions these figures could vary in a 2% range of up or down.


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