Spain is one of the European economies that was hardest hit by the COVID-19 virus crisis. Now, after years of falling real incomes, millions of families are facing skyrocketing mortgage payments as a result of rapidly rising interest rates.
Here in Barcelona (as in many other parts of Spain’s Mediterranean coastline), today (June 23) is Saint John’s Day (dia de Sant Joan in Catalan, or San Juan in Spanish). It is by far the noisiest, most frenetic, most exuberant night of the year. Generations of Catalans converge on the beaches to let off tons of fireworks and firecrackers, imbibe vast volumes of alcohol and generally make merry til sunrise. Fiendish fun for the humans, especially the children, a total drag for the dogs, cats and other animals.
During my early years in the city (2000-2008) Saint John’s Day initiated a one-week ordeal that would link up with another saint’s day (Sant Pere) on June 29. People would line up round the block to buy all kinds of pyrotechnic material, then spend the next seven or eight days blowing it all up. But in 2008, everything changed. The Global Financial Crisis hit, detonating an uncontrolled demolition of Spain’s massively inflated, over-leveraged property market.
Sant Joan has not been the same since. People just don’t have so much money to literally burn. One week of blasts and explosions has been reduced to a couple of days’ worth, much to the relief of the dogs, cats and other animals, including yours truly. Fifteen years on, I am writing this post on the eve of Sant Joan, and the streets of my neighbourhood are eerily quiet, making me wonder: Could a new housing crisis be brewing in Spain?
Blame Game Begins
Spain is one of the European economies that was hardest hit by the COVID-19 virus crisis, in part because of its huge dependence on tourism. In fact, according to figures published in February by the Organisation for Economic Cooperation and Development, Spain is the OECD country (out of 38) where the real income of families has fallen the most since the pandemic. It is also the EU country that has suffered the biggest fall in per capital income since 2020, and has been overtaken by Slovenia, Lithuania and Estonia on this indicator.
Now, after years of falling real incomes, millions of families are facing skyrocketing mortgage payments as a result of rapidly rising interest rates.
The blame game has already begun in central government. After taking a thrashing in the recent local and regional elections, Pedro Sánchez’s government now faces an uphill climb in next month’s general elections. As mortgage costs surge, the government is desperate to pin responsibility on the European Central Bank (ECB) and its Spanish subsidiary, the Bank of Spain. Asked in an interview about the state of the Spanish economy and the potential impact of the ECB’s latest round of interest rate hikes on Spanish homeowners, Spain’s Economy Minister Nadia Calviño said:
“You need to ask [Luis de] Guindos, [Vice President of the European Central Bank], and [Fernando] De Cos [governor of the Bank of Spain]; they are the Spaniards behind the rise in mortgages.”
Calviño is right of course. So too was Sánchez himself when he said on Tuesday that “the [Spanish] Government has no powers over monetary policy.”
But the mere fact that Spain’s prime minister and economy minister are both trying to shift the burden of responsibility to the central bankers is notable, since senior politicians rarely blame the central banks for anything unless they are in a truly tight squeeze. Of course, Sánchez could have added that Spain’s central bank doesn’t have any meaningful influence over monetary policy either, given Spain’s government handed all decision making powers in that vast arena to the ECB when it joined the euro at the start of this century.
For Spain, where the consumer price index (CPI) clocked in at a relatively low 3.2% in May, further interest rate hikes are no longer necessary, said Calviño, adding the caveat that the ECB needs to consider Europe “as a whole.” And in the Euro Area as a whole average inflation was 6.1% in May — almost double the rate in Spain. In six countries, all of them in Eastern Europe (Lithuania, Estonia, Latvia, Slovakia, Czechia and Poland) inflation is still above 10%.
The ECB embarked on its current hiking path in July 2022, when it increased its main deposit rate from 0.5% to 0%. Since then it has hiked a further seven times, to the current rate of 3.5%, the highest level since 2001. But while inflation has fallen, the Euro Area, like the US, still has negative real rates. Meanwhile, the sharp increase in rates is triggering all sorts of detrimental effects — many of them intended — on the financial and economic health of Euro Area economies.
Homeowners are facing surging costs as mortgage rates rise. Spain is particularly vulnerable to this trend since around three-quarters of its mortgage holders have variable rate loan contracts linked to the ECB’s deposit rate, although they are generally adjusted only once a year.
Housing Bust 2.0?
Spain has already witnessed one of the most spectacular housing booms and busts of this still rather young century. During the peak of the boom phase, from 2003-05, around 700,000 homes were being built per year, more than were being built in Germany, France, Italy and the UK combined, with an aggregate population four times greater than Spain’s. By the time the dust from the subsequent bust had largely settled, in around 2015, over 600,000 families had lost their homes (and bear in mind that in Spain mortgages are recourse, meaning that banks can — and in most cases did — go after the borrower for all outstanding debt once the house is resold).
In recent years banks, builders, large real estate developers and the previous Rajoy government have done everything they can to create a new housing bubble, with a certain degree of success. By 2019 prices in some of the country’s biggest property markets, such as Madrid, Barcelona and some of the coastal and island markets, had regained much but not all of the ground lost in the previous bust. However, in other less desirable markets, home prices had barely risen, and in some they were below where they had been in Q1 2015, when the national low point occurred.
In 2020, the year of the COVID-19 lockdowns, Spain’s housing market stalled — as it did in most countries — before picking up pace once again in 2021. In 2022, the total number of residential property sales reached 650,000, their highest level in 15 years.
But that partial recovery is now in serious danger. As I reported in late November, in Something Just Cracked in Spain’s Mortgage Market, Spain was one of the first European countries to introduce emergency measures to blunt the impact of rapidly rising interest rates on families already struggling with soaring inflation:
As data from Spain’s National Institute of Statistics shows, 72% of newly signed mortgages in August were fixed rate while 28% were variable rate. But this is a relatively new trend. In 2020, the ratio was roughly 50/50. In 2016, 90% of all new mortgages were variable rate and in 2009 it was a staggering 96%.
The upshot of this is that roughly four million of Spain’s 5.5 million mortgage holders have variable rate mortgages. Of those just over one million qualified for the government’s relief package. The most vulnerable families, defined as those with annual income of less than €25,200, have been able to reduce their interest rates to Euribor minus 0.1 percentage points under the proposed measures. Many mortgage holders are paying 1 percentage point higher than Euribor, an interbank rate that anticipates ECB moves.
Since the publication of that post, property demand in Spain has begun to sag. In fact, sales began to stagnate in December 2022, just a month after the article was published. In April, just 27,000 mortgages were signed, 18% fewer than the same month of last year. None of this should come as a surprise given the European Central Bank has increased Euro Area benchmark interest rates from 1.5% to 3.5% since November. For holders of variable-rate mortgages, this has meant having to pay significantly more in monthly instalments, just as prices for many basic goods, including food, have also soared. From Capital Madrid:
According to data from the Bank of Spain, families have allocated 41.5% of their income so far in 2023 to pay their mortgage payments, generated added expenses of €18 billion in the first two months of the year. A report from a specialised agent has analysed data from more than 2,000 transactions closed between May 2022 and May 2023 and the outlook is bleak as a result of the rise in interest rates.
According to data from the firm Housfy, the forecast for the increase in the cost of the average mortgage payment in Spain by the end of the year is that it exceeds €5,000 per year on average. “Everything will depend on how we progress in the last quarter, but we can predict that the increases will significantly affect families,” says David Espiago, director of the banking business at Housfy. According to data from INE (the National Statistics Institute), over the past year year the average mortgage payment in Spain has increased by €256, monthly, and €3,073, annually.
Spain’s Work Minister Yolanda Díaz — whose success at restoring workplace protections has made her one of the country’s most popular politicians — has proposed issuing a one-off €1,000 “bonus” to households with variable-rate mortgages if the loan is in its first 10 years of life and was issued primary residence worth up to €300,000. Díaz argues that such a measure is necessary to cushion the impact of the “double inflation” (rising prices of basic goods and services together rising mortgage instalments) households with variable mortgages now face and that it would be financed through a one-off tax on bank’s windfall profits.
It is true that banks in Spain, as in many parts of Europe, are reporting bumper profits. But Diaz’ proposal has met with scathing criticism not just from banks but from many other quarters, including among her own partners in Pedro Sanchez’s coalition government.
