A new report suggests that house prices in Barcelona are rising at more than 20 percent per annum, which is far faster than the rest of Spain. I asked a couple of local experts if they think Barcelona is anywhere near bubble territory, or headed that way.

The latest housing market report from Tinsa – Spain’s leading appraisal company – reveals that house prices in Barcelona rose 21.7% over twelve months to the end of June. That’s almost twice as fast as the next hottest market – Alicante – on 12.9%, and Madrid (10.8%).

Housing costs – purchase and rent – have been rising in Barcelona since the market started to recover around 2014, and the pace of growth has been accelerating as time goes by. The cost of housing in relation to local incomes is starting to flash red, and there is much wailing and beating of chests by local politicians  about the unaffordability of housing in Barcelona.

Barcelona Property Supply & Demand

Why are housing costs rising so fast in Barcelona? Various reasons. On the supply side Barcelona is limited by geography, long lead times in the building industry, and dysfunctional town planning. On the demand side the growing need for accommodation in the city is being fuelled by ever rising tourist numbers, economic recovery, greater mortgage lending, and increasing interest from foreign buyers and investors. Rising costs driven by supply and demand fundamentals suggests the market is not speculative, at least not yet.

Assuming no big external shocks, and assuming the Catalan nationalist drive to force independence from Spain with a referendum on the 1st October does not get out of hand, then I assume housing costs will continue rising in Barcelona for the foreseeable future, though maybe not as fast as the recent past. Rising housing costs benefit owners and vendors, but not those who rent or can’t afford to buy. This will continue to fuel local resentment in some quarters, though that is far from unique to Barcelona.

But at what point do house prices enter bubble territory, which means they become fundamentally unsustainable and heading for a fall? Are we there yet, or heading that way? I asked a couple of local market experts for their views.

Alex Vaughan, founding partner of Lucas Fox International Properties

“For a start we don’t see the same price increases as Tinsa in our figures,” says Alex, whose company Lucas Fox focuses on the higher end of the market. “Our figures show resale property prices up 12% last year, though new home prices have increased more than that in some cases, as limited stocks allow developers to raise prices. If prices have risen too fast it’s in that market, but there are a lot of new projects in the pipeline, and when they come onto the market buyers will have more choice, and can take a stronger position on price. So I expect new home prices to stabilise as developers will find it more difficult to put their prices up. I honestly don’t see a bubble inflating without cheap mortgage credit and high loans to value, which is not happening. Banks are lending more but it’s still difficult to get high LTVs, which keeps a lid on things.”

Guifré Amat, International Director of Amat Immobiliaris

“We are seeing prices up by 10% to 12.5% on average, obviously more in some cases” says Guifré, whose company Amat Immobiliaris has been selling property in the Barcelona area since 1948. “The market is clearly improving, but I don’t believe prices in general are rising by 20%. So I see no sign of a bubble yet, but we have to be careful because there are price tensions that could lead to one. One of the factors driving prices up is the time it takes to get planning permission, which has the effect of reducing supply. The local government speak out against rising housing costs, but it’s partly their fault. Bubbles tend to be speculative, but for now prices are rising simply because demand is rising and stocks are limited, so the fundamentals are still okay. But we have to be vigilant, things can change so quickly. Just two years ago everyone was desperate, and the market has turned around very quickly. I always ask lawyers to let me know if they see a mortgage with an LTV or 100%. I’ve heard of a few cases, but very few so far.”