Inflation and Real Estate Prices in Spain
Inflation occurs when the purchasing power of your euro decreases as prices rise. We can all immediately recognize it at the supermarket (Mercadona, SuperCor, Lidl etc), and the petrol station. But how does inflation affect the real estate market in Sotogrande? The answer is in many ways, but mostly on high cost of building materials, rent increases, and higher mortgage rates.
Everything today is interconnected. No bubbles exist, and we in Sotogrande are no exception. We have all just lived through the Corona pandemic and realized that the global supply chain and the economic systems that support it are interconnected. Although inflation is mostly caused by an oversupply of money into the marketplace, the current global inflation trend has in my opinion been caused two acute events, the war in Ukraine, and Covid.
Quote from Bloomberg:” The world economy is facing galloping inflation that is dragging down stock markets around the world, and during a war that is driving up the cost of raw materials. Central banks’ decision to raise rates to stifle rising prices could create an unintended domino effect in housing markets, leading to a global economic recession. New Zealand, the Czech Republic, Hungary, and Portugal, are some of the countries with the greatest risk of a real estate bubble bursting.”
There are several ways high inflation can affect the real estate market. Here are three:
- High material costs. All residential homes are built with materials that have increased in price. Be it glass, aluminium or timber, everything is much more expensive…. some say up to 40%. The supply chain almost came to a halt during the pandemic as the entire globe came to a standstill, and now with oil prices increasing, transport, land, air, or sea has also hugely increased. These cost increases are passed on the eventual consumer.
- Rent Increases. Inflation is likely to lead to a rent increase. Rising costs, like maintenance, management, and materials all add up. Landlords may even need to compensate for rising interest rates on properties that aren’t locked into fixed mortgages. Also problematic is the concern that some people renting may find it hard to pay time or in full.
- Higher Mortgage Rates. Inflation reduces the purchasing power of the euro. With this mortgage-backed bonds fall…. Large institutional investors sell off their bonds….. leading to an oversupply ….. leading to a decrease in value…… leading to higher interest rates…..all eventually hitting homebuyers searching for a mortgage to buy a new home.
All above is bad news, and quite depressing, however there is always a silver lining to every story. With Sotogrande being a luxury resort and principally a second home residential community, most property owners are wealthy enough to absorb the negative effects of inflation. However, a full-blown recession is a different story.
Thank you for reading, please send me your comments at charles.gubbins@noll-sotogrande.com
