Recently on our consultation calls I have been asked one question above all others and that is "Have the interest rate rises affected the market?" This question is coming from all over the World because it seems that they have affected many property markets and slowed markets down in North America, Northern Europe, especially the UK, and other areas. However, the situation here is somewhat different due to the nature of the demand and what is happening with mortgages at the moment. So today I thought we could look at what is happening with the market for mortgages to give you the latest situation.
The Property Market in Valencia Right Now
Unlike in many parts of the World, prices continue to rise here as the demand is still high. Local market demand is still high and of course, because of the popularity of Valencia as a destination for international buyers now, outside demand is also high. A lot of local demand does depend on mortgages being affordable as most Spanish buyers use a mortgage to purchase their property. However the interest rates are not as important to them as the lump sum or deposit required.
When banks are giving 100% mortgages then more people buy property in Spain. Usually banks give 80% to Spanish resident buyers so people have to find 20% of the price plus the 15% costs of purchase. When banks reduce their offers to just 70% of the price then it affects the potential buyers much more than a small percentage change in the mortgage rate.
As an example, for someone buying a property of 200k and being offered 80% mortgage then they have to find 40k for the purchase and 30k for the costs (15% on top), making 70k in total. If the bank only offers 70% then they have to find 90k upfront to buy which is much more difficult, even for the bank of mum and dad.
Now a mortgage of 80% on a property of 200k means a mortgage of 160k. With an interest rate of 3.5% over 25 years on a typical repayment mortgage the monthly repayment amount will be 909 Euros. If we increase the mortgage interest rate to 4% then the repayment is around 959 Euros per month, just a 50 Euro difference per month. Even at 4.5% the repayment would be 1010 Euros. So just a 101 Euro difference per month. You can play around with mortgage offers here. This doesn't affect people as much as the percentage offered being reduced.
Currently we are seeing people getting mortgage offers around 3.5%-4% with outliers between 4% and 4.5% and most are fixed rates although some are now being offered variable rates.
Now here's the kicker. We have written about the rental crisis in Valencia and the huge price rises in rental costs and bear in mind that it is not only expensive but difficult to find anything appropriate to rent. Also that 909 Euros per month mortgage payment is FIXED for the lifetime of the mortgage. The payment remains the same from the start of the mortgage until the end so you know that next year you will be paying 909 Euros and in five and ten years time you will be paying 909 Euros and most importantly you will be paying 909 Euros in 240 months time and that will be your last payment and at that point you own the property.
With rentals the price goes up yearly at least by the inflation rate and if you have to move then you may find yourself having to look for something considerably more expensive in five year's time. Therefore, you are incentivised to buy over renting because long term your costs are likely to be considerably higher renting. Meanwhile you also have an asset that, at least at the moment, is appreciating in value because of the demand. Even if prices were to reduce then you would still have an asset worth something.
Do you want to pay 909 euros now and for the next 20 years or do you want to find an equivalently priced rental and pay 4% more per year meaning that in twenty years time you are paying a minimum of 2000 Euros rental? And then remember that if you have to change your rental because the owner wants it back or decides to end the contract after 4 years then you might have to start at a much higher price, rental prices went up on average by 26% last year. Also at the end you still have no asset!! It's no wonder that Spanish people will do anything to try and find that initial amount they need to find and also why 100% mortgages were so popular for bank properties.
The Spanish Seller's Mentality
It is definitely something that we have mentioned before but Spanish sellers have a certain mentality. They are quick to raise prices if they see the market is going up but particularly slow to reduce prices when the market falls, we saw this after the 2008 financial crisis when they couldn't sell as their prices were set at the top of the market and as average sale prices fell quickly, average asking prices didn't.
The situation in Valencia is still that prices are rising on average and when you go to see a property and make an offer the owner is very reticent to accept any offers well below asking price as they expect prices to continue rising and therefore the price they are asking is "reasonable". If prices were to start falling then the mentality would be that "well, that's a maybe but my property is worth what it's worth. Why would I ask less now than last week when we had x number of visits?" It may seem illogical to you but that's how things work here.
The second thing is that when you make an offer well below asking price then it is seen as a personal insult directed at the owner not a measure of how much you think the property is worth. Get used to it, it's the mentality in place here even if you don't think it should be.
Valencia Property Clients
Interest rate rises don't generally affect Valencia Property's clients as they have more often than not sold their property elsewhere and they are buying here. Therefore an interest rate rise has no effect on their purchase. If, and when, eventually prices stall then they will be in a good position to make offers but because of the mentality of Spanish sellers, or rather sellers in Spain as many might not be Spanish, they may then be told "Nah, not interested in your offer"
Interest Rate Perspectives
There has been a steady increase in interest rates over the last couple of years and Spanish mortgages are based on the Euribor base rate which is the same for the whole of Europe.
From the above chart we can see the historical Euribor rate and it looks as if the rise is huge over the last two years. The truth is, it is, but it was higher before the financial crisis of 2008. Equally when we zoom out into the last year we can see something different.
Since July of this year, see below, Euribor rises have settled down and the tendency is down since late September. Forecasts are for Euribor to continue falling in 2024 with rates of around 3% by the end of the year.
What does this mean? It means that people are happy to contract a variable rate mortgage because their expectation currently is that mortgage interest rates will drop next year meaning they will be paying less in the future. That may be right, it may be wrong but it's their expectation.
The expectations for the market in Valencia for the next two years are for an increase in prices of just under 10% as demand remains high. This is not the highest in Spain, that mantle belongs to Guadalajara, but it is above the national average of around 6% in the period. The graph below was from late last year but it has been proved to be right up to now with the caveat that the price rises have actually been higher in the year to the end of 2023.
I may be putting my hand in the fire here but I think the price rises will actually be slightly higher at least in Valencia. Demand remains huge and if mortgage rates go down in the next year while rental prices continue to rise then I expect to see greater demand from the local market that relies on mortgages to buy. As long as the banks continue to lend then expect demand to remain high locally. Last year there were 420,000 new households created in Spain and only 300,000 new properties came onto the market and it's basic market forces that state that where demand outstrips supply then prices rise. You may not agree but we all have the right to have an opinion and we all have the right to be wrong, if wrong then I plead the fifth ;-)
There could be any number of Black Swan events with climate change ramping up, political turmoil and maybe new elections, wars, famine, pestilence and any other number of horsemen of the apocalypse or... things might just keep moving along and Valencia and Spain might continue to be seen as the safe haven from the Brexit nutters, the MAGA hate mobs, gun violence in the States, fear and war in the Middle East and so much more. Even if the new agreement to support the central government from Catalan, Basque and Galician parties falls apart as it will undoubtedly do eventually.
The Latest Valencia Property Podcast
Last week we released the latest Valencia Property podcast. In it we looked at what people leave behind, we talk about your questions and take you through some of the latest blog posts. Have a listen.
Why Do the Spanish Live in Apartments?
65% of people in Spain live in apartments which worldwide is second only to South Korea, with a quite eye-watering 74% living in flats there. This compares with the EU average of 41%, the USA with 21% and just 15% in the UK for example. The reason is because of how urban development happened in Spain and to understand why there was a fascinating article released last week in El Diario. You can read it in English here and it is truly fascinating not to mention an excellent way to illustrate data.
The image below taken from the report demonstrates how Barcelona and Valencia are two of the most Vertical cities in Spain whilst having large populations. The outlier of Benidorm is also in there! For those of you interested the highest dot there is La Coruña and the highest population density on the extreme right there is... Mislata, essentially an extension of Valencia these days but maintaining its own town hall and council.
If You Like This...
Then maybe click on the images below for other articles that might give you more of a background into what is happening in Valencia and beyond.