With some ups and downs along the way, the Spanish holiday-home market has expanded for about the last thirty years. Will this growth story continue, or are there reasons to think the market will peak and reset at a lower level, ending up a smaller niche business than it has been in recent decades?
I can’t find accurate figures, and I doubt they exist, but I can say with confidence that there are millions of second homes in Spain, hundreds of thousands of them owned by foreigners, tens of thousands of them are bought and sold each year, and tens of thousands of new ones being built right now.
Spaniards buying second homes they can easily reach by car is one thing, and that has been going on for much longer than the boom in foreign demand, which really started to take off in the 1980s. Local demand shares some headwinds and tailwinds with foreign demand, such as property prices and the availability of mortgages, but foreign demand has its own unique set of brakes and drivers that I think could prove challenging in the years to come.
Foreign demand for holiday-homes in Spain has boomed on the back of demographics (baby boomers), post-war economic growth, European integration, Spain’s transition to democracy, cheap mortgage credit, low cost air-travel, the middle-class fashion for owning a status symbol, and the investment opportunity of convenience and saving money on holidays with a property that can be rented out when not in residence. Those were the main tailwinds I can think of that have driven the boom in foreign demand for holiday-homes in Spain.
Foreign demand for property in Spain has recently turned negative after years of growth (graph below), dragged down by lower demand for Spanish second homes amongst northern Europeans.
This might be because some of the tailwinds have already lost strength with time, for example European demographics, and lower economic growth. Some of them could even turn into headwinds in future, so let’s look at the potential breaks on foreign demand in future.
You don’t have to travel far down the Spanish coast to see how the second-home industry has over-developed many areas with no concern for the environment. It was always a turn-off for some, but I think the problem grows as society gets more concerned about the environment.
And even though some people deny it, and the negative consequences are still not clear, global warming is becoming a bigger issue every year. The way things are going it’s easy to imagine that air travel will get more expensive as Governments increase fossil fuel taxes, which could really put a dent in foreign demand.
It might soon be frowned upon and unfashionable to own a second home abroad, if the likes of Greta Thunberg and Extinction Rebellion change attitudes towards the carbon-footprint of second-homes you can only reach by plane.
And lastly, if global warming has a big impact soon, that could affect the climate in Spain and northern Europe in a way that undermines demand for holidays in Spain.
It seems to me that global warming and environmental concern could become a big headwind for the Spanish holiday-home market in years to come.
Spanish holiday-home prices
Spanish property used to look very cheap to northern Europeans, but prices rose as Spain got richer, and despite a window of opportunity during and after the crash of 2008-2014, the bargain argument is not as strong as it was, especially if you want something nice. When you throw in transaction costs, bureaucracy, and the lack of professionalism in the sector, buying a second-home in Spain is not the no-brainer it once was.
Spanish Holiday-rental controls
There is a patchy trend towards controlling or limiting holiday rentals in many areas on the Spanish coast. For example, holiday rentals are now, to all intents and purposes, illegal in Barcelona, the Balearics, and the Canaries, and controlled in Andalusia and Catalonia outside Barcelona. Taxes on rental incomes are high and better enforced. If it’s hard or impossible to rent out a second-home when not in residence, it becomes much more costly to own, and the investment case much reduced. The trend towards greater holiday-rental controls could blow a stiff breeze in the face of foreign demand, as I think it has already started to do.
The UK has long been the biggest foreign market for second homes in Spain. Absolute demand and UK market share has been on the slide since Brexit but that could turn into a slump in the event of a Brexit that significantly limits British access to Spain or leaves the UK poorer. So Brexit might have a lasting negative impact of British demand for holiday-homes in Spain, which will shrink the overall market. Another consideration to bear in mind is that fact that the UK has already increased taxes on buyers in the UK who own second-homes abroad.
I don’t expect the Spanish holiday-home market to disappear anytime soon, but I do see the risk of headwinds as discussed above leaving the market smaller and less liquid in future. Nobody needs a second-home in Spain – it’s a luxury. The more the headwinds, and the weaker the tailwinds, the more people will give up the dream of owning a second-home in Spain. Of course, this is all just speculation, and things could turn out very different, but anyone considering buying or selling a holiday-home in Spain should have these considerations in mind. Buying is easy. Selling’s the hard part.
I think there is a real risk the Spanish second home market will end up much smaller and less liquid than it has been in the last few decades. If that turns out to be the case, you should not buy in Spain unless you have more than enough cash to do so without caring if you lose money on the investment. Market depth and liquidity is a reason to buy property in Spain, but the opposite is also the case.