Costa del Sol Property Report Q1 2023: Inflation Falling and Property Market Trends
In our previous report for 2022, we anticipated a year of moderation in the Costa del Sol property market in 2023. However, the latest data for the first three months of the year confirms that prices are still on an upward trend and sales remain strong, suggesting that the market in this region is following a different course compared to the rest of Spain.
Macro-economic Overview:
Before delving into the property statistics, it is important to consider the macroeconomic context in Spain, which sets the backdrop for the market.
Spanish Economy:
After experiencing a 5.5% GDP growth in 2022, one of the highest in Europe, Spain is expecting a less vibrant year ahead. The Bank of Spain predicts a growth rate of 1.6% for this year, slightly higher than the European Commission’s forecast of 1.4%. These figures, however, surpass the expected Eurozone growth rate of 1%. The current growth predictions for Q1 stand between 0.3% and 0.5%.
Spanish Inflation:
After a period of rampant inflation in 2022, Spain has started 2023 with more moderate inflation rates. In March, the inflation figure stood at 3.3%, the lowest monthly rate since August 2021. Underlying inflation, which excludes food, continues to rise and reached 7.5%, primarily driven by the increasing cost of food.
The latest data from INE (National Statistics Institute) reveals that Spain’s inflation rate has fallen below 2% for the first time in two years, dropping to 1.9% in June. This significant decrease, almost 1.5% lower than May’s rate (3.2%), can be attributed to factors such as declining energy prices, measures in food and transport, and the ‘step effect.’ In comparison to the peak of the inflationary crisis in June 2022, when prices reached 10.8%, the current rate reflects a statistical effect, taking it to the lowest level since April 2021. Spain currently has the lowest Consumer Price Index (CPI) rate in the Eurozone, confirming the effectiveness of measures to reduce taxes and bonuses, as stated by the Finance Minister, Nadia Calviño.
Core inflation, excluding fresh food and energy products, has dropped below 6% for the first time in a year to reach 5.9%, 0.2% less than the previous month. This rate will serve as a reference for determining the continuation of the reduction in the Spanish sales tax (IVA) on basic foodstuffs. The government has extended this reduction until December 31, specifying that if the underlying rate falls below 5.5% in September, the reduction will not be applied starting from November 1.
Interest Rates:
In contrast to the inflation trend, the Euribor, an indicator of mortgage interest rates, shows no immediate signs of decreasing and is currently approaching 4%. Most analysts believe it will rise to 4% at some point in the near future, with expectations that this percentage will represent the highest point for this year. The future direction of interest rates depends on various factors, including the economic situation in the Eurozone, developments in the Ukraine conflict, and potential disruptions in the banking sector.
While the number of mortgages taken out in Spain has declined over the past year, indicating a market slowdown, the Costa del Sol appears to be less affected by rising interest rates. According to the Malaga Property Observatory (OMAU), 45% of buyers in this region purchase properties without loans, suggesting that the market here is not as impacted by interest rate increases.
Costa del Sol property market outlook for the rest of 2023
Looking ahead to the remainder of 2023, the Costa del Sol property market is expected to maintain its upward trajectory, albeit with a slightly less pronounced curve. The market is influenced by a significant number of foreign buyers and investors, coupled with a limited supply of properties, which contributes to the ongoing increase in prices. However, recent data regarding Spain’s inflation rate indicates a potential containment of prices.
Spain’s inflation rate has fallen below 2% for the first time in two years, reaching 1.9% in June, according to the country’s INE national statistics institute. This represents a significant drop from the previous month’s rate of 3.2%. The decline in inflation can be attributed to factors such as the decrease in energy prices, measures taken in the food and transport sectors, and the so-called “step effect.”
The “step effect” refers to the statistical impact of comparing current prices with the exceptionally high values of the previous year. In June 2022, prices reached their peak during the inflationary crisis, reaching 10.2% and rising further to 10.8% in July. Consequently, when comparing prices with the elevated levels of last year, there is a statistical effect that brings the inflation rate to its lowest point since April 2021.
These developments in inflation are noteworthy, as Spain currently has the lowest Consumer Price Index (CPI) rate among the eurozone economies. The Finance Minister, Nadia Calviño, has expressed confidence in the effectiveness of measures aimed at reducing taxes and providing bonuses.
Core inflation, which excludes fresh food and energy products, also showed a decline, falling below 6% for the first time in a year to reach 5.9%, a 0.2% decrease from the previous month. This core inflation rate will serve as a reference for determining whether the reduction in the Spanish sales tax, known as IVA, on basic foodstuffs, which the government recently extended until 31 December, will be maintained. The Cabinet specified that if this underlying rate falls below 5.5% in September, the tax reduction will not be applied starting from 1 November.
In terms of interest rates, the Euribor, which reflects the average interest rates at which eurozone banks lend to one another, has shown no immediate signs of decreasing. Currently approaching 4%, most analysts anticipate that it will rise to 4% at some point in the near future, with expectations that this percentage will be the highest for this year. However, the impact of interest rate hikes on the Costa del Sol property market appears to be somewhat mitigated, as 45% of buyers in the region purchase properties without relying on loans, according to the Malaga Property Observatory (OMAU).
Despite the overall economic factors and potential challenges, the Costa del Sol property market remains robust and resilient. Official statistics for the first quarter of 2023 are yet to be released, but data from the Spanish Statistical Institute (INE) reveals that during January and February, there were 5,767 property transactions in the province, with February alone accounting for 3,042 sales. Although this represents a 14.4% decrease compared to the same period in 2022, it is important to note that over 108 properties changed hands daily on the Costa del Sol in February, indicating a continued active market.
When it comes to property prices, various sources provide an overview of the situation. Tinsa, a valuation company, reported a 7.6% year-on-year increase in Costa del Sol real estate prices, reaching an average of €1,977 per square meter in the first quarter of 2023. Additionally, Idealista, a leading real estate platform in Spain, recorded a similar upward trend, with an average price increase of 6.5% in the province of Malaga during the same period.
The demand for properties in the Costa del Sol remains high, driven by both domestic and international buyers. The region’s appeal as a tourist destination, with its pleasant climate, beautiful beaches, and vibrant lifestyle, continues to attract investors and second-home buyers. Foreign buyers, especially from Northern Europe and the UK, have shown a particular interest in the Costa del Sol market.
Costa del Sol prices in April 2023
Several places on the Costa del Sol surpassed the area’s average price increase at the beginning of this year. According to Idealista, many registered double-digit hikes, for example:
Benahavís – prices rose by 7.5% to €3,981 per square metre, slightly below the increase in Q4 2022.
Estepona – values continued to soar by 19.3% to €2,993 per square metre.
Manilva – prices skyrocketed by 18.8% to €2,149 per square metre.
Marbella – values surged by 18.6% to €4,138 per square metre.
Sotogrande – property prices continued their upward trend and went up 7.8% to €2,723 per square metre.
All five resorts except Benahavis saw strong quarterly growth in Q1 as well. In Marbella alone, prices experienced a 4% uptick between December and March.
Although Tinsa estimates that Costa del Sol property still has 22.6% to grow before it regains its highest price on record (reached in 2007), the valuations company brings this figure down considerably for some locations. Marbella is a case in point, and Tinsa calculates that prices in this resort are just over 10% away from their maximum.
However, the limited supply of properties, especially in highly sought-after areas such as Marbella and Estepona, contributes to the upward pressure on prices. New construction projects are underway to meet the growing demand, but it takes time for these properties to enter the market.
The COVID-19 pandemic has also had an impact on the property market in the Costa del Sol. While the market experienced a slowdown during the height of the pandemic, it has shown resilience and a strong recovery as travel restrictions eased and vaccination efforts progressed. The desire for spacious homes, outdoor living areas, and proximity to nature has become even more important for buyers in the wake of the pandemic.
In conclusion, the Costa del Sol property market is expected to continue its positive momentum throughout the remainder of 2023. Factors such as limited supply, high demand from both domestic and international buyers, and the region’s appeal as a tourist destination contribute to the ongoing increase in property prices. While inflation rates in Spain have shown a recent decline, the impact on property prices remains to be seen. The market’s resilience and attractiveness, coupled with ongoing construction projects, position the Costa del Sol as a vibrant and promising real estate market.
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