Local demand has more than recovered all the ground it lost to Covid, whilst Foreign demand is still 16% lower than it was before the pandemic, one assumes partly due to continuing travel restrictions keeping some foreign buyers away. If and when the pandemic is finally behind us, what factors will influence the growth of foreign demand, and might they help drive a full recovery?

Foreign demand for property in Spain was already going soft before the pandemic. As you can see from the chart above, home sales to foreigners peaked in 2018, and were on a downward trend from 2017 to 2019. However, an optimist might argue the trend showed signs of turning a corner in the second half of 2019, and might have returned to growth had it not been for Covid-19, which obliterated all other trends. 

In fact, it wasn’t just foreign demand that went soft in the years before the pandemic. As you can see from the next chart, local demand also cooled off in 2018, and turned negative in 2019, before starting to recover in the second half of the year, only to be floored by Covid in the first half of 2020. The curves show that local and foreign demand were following a similar path, although foreign demand was more negative. 

So, why was foreign demand cooling down in the years before the pandemic? What were the headwinds the market was facing, and will they still be here after the pandemic? 

There are various reasons why foreign demand was cooling before the pandemic, after years of strong growth. 

Higher Spanish house prices

For years after the Spanish property crash house prices were so low that investment looked like a ‘no brainer’ for those happy to take a bit of risk for a bargain. Then house prices grew strongly from 2014 onwards (chart), and once prices started to look more normal by 2017, an increasing number of people were priced out of the market, or at least started thinking twice. The pandemic dragged prices down in the first half of 2020, but not to bargain levels like after the crash, and prices appear to be rising again in aggregate. So it doesn’t look like foreign demand will be boosted by bargain-hunters like last time.

Interest rates

After falling into negative territory between 2014 and 2018, euribor interest rates stopped declining  in mid 2018, and started to head back towards positive ground, making Spanish mortgages more expensive. Covid has sent them plunging back down to record lows, which will help stimulate demand as long as they stay so low. There is no sign of the ECB raising rates anytime soon, and with inflation starting to pick up this is a good argument for investing in property. This situation might help boost foreign demand after the pandemic, as long as rates remain low. 

Politics

Spain was in the news for the wrong reasons in 2017 and 2018. There was a constitutional crisis in Catalonia, followed by political instability in Madrid that took several general elections to resolve. The bad press these events generated unsettled foreign investors, and led many to adopt a wait and see approach. Partly as a result of this there was a deceleration of foreign (and local) demand in 2018, after almost a decade of solid growth. By 2019 the news was better, and foreign demand appeared to start recovering, then Covid came along and stopped the recovery in its tracks. 

For now Catalonia is grumpy but calm, and the Government in Madrid looks stable, which helps to reassure foreign investors. The coalition government no longer includes the hard-left firebrand Pablo Iglesias, which also helps to calm the waters. So politics is less of a headwind for the market than it was in the years before the pandemic. But as they say, a week is a long time in politics, so everything could change fast.

Brexit

The UK has long been the biggest foreign market for Spanish property. Brexit makes life difficult for British buyers, and has undoubtedly reduced demand, especially now that ‘real Brexit’ has kicked in since the start of 2021. Brexit will drag down foreign demand for years to come after the pandemic.

Taxes and transaction costs

Spanish taxes on property purchase and ownership are high compared to other countries, though it does vary by region. Some regions like Catalonia are high tax, whist Madrid is low tax. As property prices rise, so do taxes. At some point the high taxes and transaction costs will discourage foreign investors, who can choose to buy elsewhere. That point has already come judging by the comments on my recent article on Spanish Golden Visa demand.

After the pandemic?

The coronavirus isn’t the only challenge facing the foreign market for property in Spain. Higher house prices, high taxes and transaction costs, and Brexit are also headwinds that will hold the market back once the pandemic and travel restrictions ease. On the other hand, low interest rates, and calmer politics should help Spain sell its perennial attractions of climate and lifestyle. On balance I expect foreign demand to recover the ground it lost, but it could take several years to get back to pre-covid levels, in contrast to strong growth in the local market.