As statistics show us daily, these are disruptive times for economies everywhere. The latest statistics for Spain prove the point – it has, so far, been the worst-hit country in the eurozone with punishing figures for GDP this year. Spain is now in a recession, but is this situation transient or are we moving towards a longer-lasting depression? And what are the likely effects on the Costa del Sol property market?
In this article, I attempt to answer these two questions, based on recent statistics and how we perceive market behaviour at the moment. It’s worth noting that although predictions are always conjecture, they are now more so than ever given the volatile nature of COVID-19.
When is an economic slowdown a recession or Depression?
First, the technicalities. While economists generally agree on a definition of a recession, they differ on one for a Depression. According to economic textbooks, a recession happens when a country registers two consecutive quarters of negative GDP growth. Depression is usually considered a prolonged recession, sometimes lasting several years.
The last major recession, sparked by the subprime crisis, happened from 2008 onwards. Its effects lasted for several years, but even so, the Americans call it the Great Recession, rather than a Depression. The Spanish refer to it as “La Crisis”. To find the last Depression, you need to go back to the 1930s when the worldwide economic downturn lasted beyond the Second World War.
Spain’s latest statistics
Figures released in early August for Spain’s GDP in Q2 made for sober reading. The Spanish economy contracted by 18.5% in Q2 between April and June, the second-worst result on record and the most significant drop since 1940. GDP fell by 5.2% in Q1 this year, so in technical terms, Spain has entered a recession.
The statistics for other sectors of the economy were even worse. Household spending plummeted by 21.2% in Q2 when investment nosedived by 21.9%. These figures are, however, nothing compared to those for tourism. Between January and June this year, Spain welcomed 27 million fewer tourists than during the same period in 2019. The floor literally dropped out of the tourist industry, which suffered a 90% decline.
COVID-19 has reaped havoc on economies across the globe, but Spain has suffered particularly badly because of two main factors:
- The economy relies heavily on tourism and the services sector (dependent on the interaction of people). Since travel stopped in mid-March and Spaniards were confined to their homes, both tourism and the services sector fell to practically zero.
- Spain applied one of the strictest lockdowns in the world. People were unable to leave their homes except for essentials for a full seven weeks and did not gain complete freedom of movement for another seven.
The outlook for the rest of 2020
Despite the depressing figures for Q2, the latest statistics for July appear to point to a more upbeat scenario. Unemployment fell by nearly 90,000 people in July, the most significant drop for this month since 1997. Based on BBVA card payments, household spending is on a par with pre-COVID-19 levels.
More importantly, Spain has just secured EU funding to the tune of nearly €140 billion. €77.3 billion will be available as grants and the remainder as loans. While the release of the money is subject to structural reforms, the funding will provide a much-needed boost to the Spanish economy.
Forecasts point to another drop in GDP in Q3, not as high as Q2 but by no means close to positive territory. Tourism, which accounts for 12.1% of Spain’s GDP, had a slow July. And the quarantine imposed by the UK Foreign Office on British citizens returning from Spain has turned off the tap on the UK market, the most significant component of Spanish tourism.
Forecasts for 2021
While the consensus is that GDP will contract this year by between 10% and 15%, figures move back into the black for 2021. The Bank of Spain predicts GDP growth of 9.1% next year, and CXBK Research puts the number slightly higher at 10.9%.
As the economy starts to adapt to the post-COVID-19 era, analysts believe the Spanish economy will gradually make its way back to pre COVID-19 levels. They do concur, however, in that the recovery will be shaped more like a U than a V.
In conclusion, COVID-19 looks as if it has sent the Spanish economy into recession, but thankfully not a Depression. There is also the feeling that this crisis will last as long as it takes for the world to conquer or substantially alleviate the virus’ devastating effects on health. With several vaccines now in human trials, COVID-19’s days could soon be over before the year is out.
Effects on the property market
So, how has the Spanish property market fared since early March and will it mirror the economy and enter a recession or even a Depression? Firstly, the market in 2020 sits on very different pillars than it did in 2008 when the last major crisis floored Spanish property.
- Household and bank debt levels are now well below those registered in 2008.
- Spanish banks enjoy a healthy financial situation.
- There is currently little excess supply on the market – the Tinsa Coastal Property Report 2020 found that 83.3% of coastal areas in Spain had no or very-low new-build supply.
- House prices in Spain are generally well below their 2007 peak (with the exception of Madrid and Barcelona).
All four of these factors point to a consolidated market with firm foundations to face the challenges of COVID-19.
The Costa del Sol property market pre COVID-19
According to the Tinsa Coastal Property Report 2020, prices on the Costa del Sol generally rose in Q1. For example, house prices for Estepona property went up by 8.2% to reach an average of €1,783 per square metre, and those in Marbella increased by 7% to €2,388. Despite consistent rises over the last few years, house prices are still well below their peak (Q4 2007). Specifically, those in Estepona are 35.6% below and those in Marbella, 20.8%.
Sales in February reached 2,225, slightly below those recorded in February 2019. In Q1 2020, year-on-year transactions dropped by 9.7% in Marbella and by 6.8% in Estepona. In terms of new developments, the western Costa del Sol (Estepona to Malaga) had 200 projects underway or in the pipeline. Sales of new-build homes in Marbella went up by 71.1% in the year to Q1 and by 23.3% in Estepona.
The Costa del Sol property market now
Five months since the start of lockdown, the Costa del Sol has been clearly affected by COVID-19, but to a lesser extent than other holiday home markets in Spain. The latest figures for sales (May 2020 when Spain was easing slowly out of lockdown) show that they dropped by 57.8% in the year. However, the decrease is not nearly as high as Barcelona (down 80.3%) or Alicante (down 65.5%).
Estate agents in the area report significant interest from both Spanish and foreign buyers in Costa del Sol property. Travel restrictions have meant that demand among international buyers for properties between Marbella and Estepona dropped slightly due to COVID-19. On the other hand, Tinsa reports that Spanish demand barely registered any change.
House price trends are more difficult to gauge, and there are, as yet, no official figures for the post-lockdown period. The property portal Idealista reports a 0.8% rise in prices on the Costa del Sol in June compared to a year earlier. Tinsa expects a decrease in the area for the cost of resale properties of between 5 and 15%.
Where next for the property on the Costa del Sol?
Historically, the Costa del Sol property market has always been one of the first in Spain to enter recession because of its dependence on foreign buyers. It has also always been one of the first to leave a downturn in the cycle. I believe that there is every indication that the Costa del Sol will follow a similar pattern during this current recession.
Demand – while the area relies heavily on foreign buyers, a substantial percentage of them already live on the Costa del Sol. The area also attracts many relocating foreigners or the so-called snowbirds who live on the Costa del Sol during the autumn and winter. Travel restrictions will have minimal effect on this demand. Tinsa expects a sustained and rapid recovery among foreign buyers on the Costa del Sol.
New builds – with the exception of Estepona where there’s a sizeable inventory of new-build properties, the western Costa del Sol generally has a low supply. Many new builds under construction have already been sold off-plan meaning that prices will remain unchanged. Developments in the pipeline may well be postponed for a year or two.
Sales – the impact of lockdown means that 2020 will notch up fewer sales than 2019. CXBK Research predicts a drop of 35% in house transactions across Spain this year but forecasts a rise of 17% in 2021. We expect to see a similar pattern on the Costa del Sol with a possible uptick in Q4 this year depending on travel restrictions and possible future lockdowns.
Spain is undoubtedly in a recession, but unless COVID-19 remains out of control for several years (an unlikely scenario given the advances in vaccines), a depression seems unlikely. The property market in general and specifically on the Costa del Sol currently sits on rock-solid foundations. Demand is sustained, and while prices and sales look set to dip slightly, there is every sign that 2021 will see a return to pre-COVID-19 activity.