Crippling Impact of Declining Real Estate Market and Tight Monetary Policy on Mortgage Seekers in Spain

A real estate market in decline and a monetary policy that does not relax. The combination is fatal for mortgages; That is, for those who aspire to buy a house and need financing to pay for it. And as a result, loans for home purchases have already fallen for five months in Spain, while average interest rates have reached levels not seen since 2016, the year in which the European Central Bank (ECB) lowered interest rates. rates to 0% and inaugurated an era of ultra-cheap money that would last for years, until the recovery from the pandemic and the war in Ukraine forced a drastic change of script. In July, according to data released this Wednesday by the INE, 29,223 housing mortgages were created, almost 19% less than in the same month of 2022. Since last March, the Spanish mortgage market has subscribed to double falls. digit.

At the same time, interest rates are rising rapidly, in line with the official rates set by the ECB and with the movements of the Euribor. The average interest, calculated for the first year of the loan, was 3.24% in July. You have to go back seven years, to August 2016, to find a similar level. Not since that summer has such a high interest been seen on fixed-rate mortgages, which on average were close to 3.5% (the average interest was exactly 3.49%, according to the INE). And the variables, at 2.95%, approached the psychological barrier of 3%, a level that they have not exceeded since April 2017.

The rise in rates is causing other effects on the mortgage market. One is the reinvigoration of variable loans. These, which largely dominated the market ten years ago, began to give way to the permanent ones, which became the majority during the pandemic. However, the rising cost of loans makes the offer of fixed mortgages unattractive for many buyers. For this reason, the variables have been gaining market share for months: in July they were already 42.2% of the total, when in the same month of 2022 they barely represented 25%.

For Juan Vilén, head of the mortgage division of the Idealista real estate platform, this Wednesday’s data “delves into the trend that we have been observing in recent months: sharp drop in the number of transactions, increase in the cost of all mortgages, both fixed and variables, and greater prominence of mixed mortgages, framed in statistics within the variables.” In his analysis released to the media, the expert predicts that “the coming months will maintain this line” and only sees a possible change of scenario towards the end of the year.

At the same time, the attempt by many borrowers to protect themselves from the escalation of mortgage payments has caused a large movement of changes in loan conditions. They are novations (if it is carried out with the same bank with which the loan was already had) and subrogations (if it involves a change of financial institution). In July, the INE reported 3,951 mortgages with changes in interest rates. The majority, 3,397, were loans with variable interest, but after the change only 2,509 maintained that type. That is, many chose to go to a fixed rate despite it being more expensive to protect themselves from possible increases in the coming months.

Another sign that households are finding it increasingly difficult to pay their bills is the smaller amount of loans. On average, mortgages for the purchase of a home had an amount of 143,412 euros, 2.6% compared to twelve months ago. The combination of less bulky mortgages and the lower volume of signatures means that the capital lent by financial entities, almost 4,191 million, fell by nearly 21% compared to July 2022. Between January and July, banks have lent almost 16 % less than in the same period of the previous year, and 14.4% fewer loans have been established.

All these figures refer to home mortgages, which represent the bulk of the market but not its entirety. If the focus is expanded, the disaster is even greater. In July, 37,701 mortgages were established in Spain on any type of rural or urban property (the latter, in addition to homes, may include premises, garages, storage rooms…). It is 20.3% less than a year ago, and the borrowed capital (6,216 million) fell by 20.5%.

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