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House prices in Spain will continue to fall during 2014 and bottom out in 2015 when the demand for housing is likely to improve, according to a new analysis of the nation’s residential real estate market.

The report from Fitch Ratings points out that according to figures from the Housing Department the Spanish house price index (HPI) reached a peak year on year decline of 10% in December 2012 and fell by an additional 2.3% by the third quarter of 2013 which means that overall, the HPI has fallen by almost 30% since the onset of the financial crisis.

Despite the deceleration of house price decline, Fitch predicts that prices will continue to fall during 2014 and bottom out in 2015. It says that the house price decline will be driven by an estimated property overhang of above one million units.

The report also points out that during 2013 banks become increasingly willing to offload retail residential assets at deep discounts. Fitch expects this trend to continue, which, combined with the initiation of the commercial activity by the asset management company SAREB in the middle of 2013, will continue to put significant pressure on house prices.
 
However, in the next two years, Fitch believes that improved affordability will revitalise the demand for housing, which still remained sluggish during 2013. The house to income ratio should further improve in 2014 on continued house price declines whilst nominal incomes moderately increase.

Mortgage performance is highly vulnerable to a rise in interest rates, according to the report, since most loans are variable rate linked to Euribor, which is currently at historical low levels but could revert to higher levels in the medium to long term.

But mortgage lending is expected to remain depresses in 2014. New mortgage lending volumes have continued their steady decline reaching a historical low of 100,000, which is less than 20% of peak year lending volumes.
 
Fitch expects credit availability to remain low during 2014 in the context of a slow economic recovery and the continued deleveraging process of the banking sector. ‘Nonetheless, we believe that increased house price affordability will gradually revitalize demand and mortgage lending while moving into 2015,’ the report explains.

Meanwhile, Tinsa, a Spanish property appraisal company, also believes that prices will fall further this year. Its latest report says that prices have fallen by 39% since the peak of the market but further declines this year will be less than the 9% drop in 2013.

The firm predicts an improvement in demand which will see the current glut of properties gradually reduce by 2017. It suggests bottom will be reached during 2014 with sales of around 100,000 homes this year and again in 2015.

But it also warns that the pipeline of new homes being started has run dry and this could create problems in the future with shortages of the kind of homes people actually want to buy. Some experts fear this could lead to escalating prices in some sectors that are popular, especially those that attract a lot of overseas buyers.

This article was republished with permission from Property Wire.