The current economic juncture we are experiencing is new to many of us. After more than 10 years of 2% inflation and negative or near zero interest rates, central banks have been forced to raise them due to inflation that is far from being “under control”, as stated by Powell of the FED (US Central Bank) in early 2022.
It is clear that the housing market, as the primary sector of the economy, will be affected. It is already experiencing some effects, but in what way?
In 2022, from April to October, those who wanted to buy a house rushed to do so with little or no negotiation on price, which boosted the market and even caused house prices to rise in some cases. This is a normal phenomenon when it is perceived that, due to inflation and an economic climate in which prices are rising, everyone rushes to buy, be it bread, water, clothes, computers or even property, lest tomorrow prices rise even more.
This human behaviour fuels inflation and makes it more difficult to control. Short-term growth in demand has negative consequences in this respect.
As of June 2023, we have seen several interest rate hikes. Between the two major banks, the FED and the ECB, we are at 5.25% and 4% respectively (in terms of lending to banks).
From a housing market point of view, it is clear that mortgages have had to go up, which makes access to credit more difficult and affects the mortgagors. So what happens now, will we face a crisis with a recession and falling prices?
This is a question that no one can answer exactly, but the more important question is: if we logically think that there will be at least a pause in the rise in prices compared to 2022, when will it happen?
We think it is useful to take a look at the price history in the first 20 years of the 2000s. We can see that the years 2006-2007 were the years with the highest average prices, reaching 4,700-4,600 euros per square metre. In 2018, there was an approximation with around 4,400 euros per square metre, and currently we are slightly above 4,000 euros per square metre, with a more stable price.
But if we look at the last 5 years, since 2018, we are already experiencing a negative trend in prices: 4,100 in 2019, 4,000 in 2020 and 2021, and a return to 4,000 in 2022 due to the reasons mentioned above.
So what should we do, should we sell now, and should those who buy wait? Seen in this light, the answers would be yes and yes, but the market is not so easy and logical.
We will surely face a soft landing or a recession, this is inevitable, and in both cases there will be a lower demand that will adjust prices, but we do not know when and for how long.
Therefore, given that real estate investment is long term, we suggest buying and selling, but always doing so in a professional manner, without getting carried away by the “momentum”, informing ourselves and seeking advice from professionals in the sector.
In any case, the future is always a hypothesis, and as Socrates said, “ἓν οἶδα ὅτι οὐδὲν οἶδα” (I only know that I know nothing).
Davide Rigoni, CEO of InversionesBCN