January 2007

The Barcelona property market has risen strongly since 1997, with double-digit price rises in most districts every year with the exception of 1998.

A growing Spanish economy, increasing employment, cheaper borrowing (lower interest rates and innovations in the mortgage market), a cultural preference for buying over renting, and the impact of rising foreign demand for property in Barcelona has pushed overall demand up whilst the supply of property has remained fairly constant (constrained by mountains and sea Barcelona cannot expand through sprawl).

The increase in tourism to Barcelona has also increased the pressure on the property market as residential property in Barcelona’s most attractive central districts has been converted into hotels. These supply and demand factors explain the tight property market, and robust price increases of recent years.

However, there are clear signs that the Barcelona property market is beginning to cool. Until recently property in Barcelona sold quickly, with little or no room for negotiation over price. Now, however, the average time to sell is increasing, and vendors are more disposed than before to negotiate over price. Anecdotal evidence from bank managers also suggests that the number of new mortgages being granted in Barcelona is falling (one bank manager describes the market at the start of 2007 as dead), and that first time buyers are being prevented from entering the market by high prices.

Figures from the Spanish property portal ‘Idealista’ clearly show that the growth in asking prices in Barcelona is cooling down. Barcelona property asking prices rose by 8.2% in 2006, down from 15.2% in 2005, and 18.3% in 2004.

Property market cooling down in all Barcelona districts

Almost all of Barcelona’s districts have experienced double digit price increases in all of the last 6 years. The Old Town has lead the way with increases of over 20% most years. Sant Martí (the area nearest the beach that includes Poblenou and Diagonal Mar) has been another strong performer. These are districts that for various reasons appeal to foreign buyers and that were some of the cheapest areas to buy in Barcelona 10 years ago. Over the past 10 years property prices across districts have converged substantially. This suggests that bargain districts do not exist to the extent that they used to.

These figures demonstrate that Barcelona has undergone a sustained period of robust property price increases over the last 6 years. There are various factors driving this growth including the unusually low cost of borrowing, a strong Spanish economy with a paradoxically weak stock market offering poor investment returns, increasing employment, increasing tourism requiring property for hotel use and the impact of growing foreign demand on Barcelona’s fixed supply of property.

I think it unlikely that prices will continue rising across the board to the same extent in the coming years as they have in the past. In my opinion price increases will slow in the next couple of years, with single digit growth or stagnation a likely outcome. However, in the absence of any major external economic shocks I think it unlikely that prices will fall in any of Barcelona’s key districts, though I certainly wouldn’t rule it out. House price will fall if Spain goes into recession at any point, though no leading organisation or publication is forecasting a recession anytime soon for Spain.

The behaviour of foreign demand for property in Barcelona will be a key factor in determining the direction and rate of property price changes in Barcelona’s key districts over the coming years. In recent years there has been a notable increase in demand for property in Barcelona amongst foreign buyers. The British are leading the way, but they are far from alone: Other foreign buyers include the Irish, Dutch, Germans, Belgians, Scandinavians, Russians and the French. I believe that this trend will increase over the coming years as European integration, increasing labour mobility, technology and low cost travel enable more people than ever before to base themselves out of Barcelona for all or part of the year. However, this outcome should not be taken for granted. If the political (nationalistic) and economic situation deteriorates, Barcelona may lose its appeal for foreigners.