Opportunities for foreign operators
The mortgage market in Spain has seen significant evolution over the past decade, shaped by economic and political forces domestically and internationally. This essay will provide an in-depth analysis of the Spanish mortgage market based on recent data, examining key trends and metrics and providing critical insight into the forces influencing the financial services market in Spain.
Traditional Mortgage Landscape
Spain's traditional mortgage landscape, with an average term of 25 years and 65% of mortgages at fixed rates, could offer a unique niche for a long-term fixed-rate model. Moreover, Spain's overall mortgage stock stands at ~500 billion euros, making it the third-largest market in Europe, behind only Germany and France. In Spain, entities offering home-backed mortgages, although not banking operators, they must secure approval from the Bank of Spain as an Establecimiento Financiero de Credito (EFC).
Market overview
After years of growth following the 2008 financial crisis, data reveals the Spanish mortgage market has entered a phase of deceleration. Mortgage lending decreased 23% year-on-year in Q1 2023 while total lending value declined 4% over the same period, pointing to a slowing financial services market in Spain. This aligns with broader European trends driven by factors like rising interest rates, inflation and economic uncertainties.
However, Spain's downturn appears more gradual than in neighbouring countries. Relaxed pandemic travel restrictions driving foreign investment, coupled with Spain's comparatively strong pandemic recovery owing to tourism, have softened the slowdown versus other European digital lending markets. Early data suggests a measured deceleration rather than an abrupt correction in the Spanish financial services market.
Spanish mortgage market
The average mortgage value hit a peak of €154,430 in Q1 2022 but has since dropped to €146,870 as of March 2023, a 4% decrease. This points to diminishing pricing power for sellers with weaker buyer demand in the Spanish financial services market. However, the decline is modest relative to more severe corrections in other countries.
More significantly, climbing interest rates have critically impacted affordability. According to Bank of Spain data, the percentage of income required for repayments jumped from 30% to 36% in just one year as rates rose, highlighting how surging rates stretch affordability as mortgage costs claim a greater share of buyers' incomes in the Spanish market.
With further rises anticipated, this affordability squeeze looks set to continue, presenting challenges for market entry and expansion by financial services firms targeting Spain. ING predicts average variable rates could reach 5% by end of 2023, far higher than the 3.9% seen in April 2023. This will likely exert additional downwards pressure on prices as buyers struggle meeting repayments.
Variable vs fixed interest rates
The growing spread between average variable (2.72%) and fixed (3.15%) rates is also noteworthy. Logically this should incentivise borrowers towards lower variable rates for short-term savings, evidenced by their increasing market share in Spain.
However, fixed rates offer long-term stability and protection from further hikes, which given consensus around additional rises, may appeal to risk-averse borrowers. This dichotomy will likely drive competition between lenders on variable and fixed rate mortgage products in the Spanish market.
Market fundamentals
While leading indicators point to slowing demand, certain structural factors may prevent an abrupt crash. Firstly, energy costs are decreasing from 2022 highs, easing wider inflation pressures on households. Secondly, continued nominal wage growth, supported by strong labour market conditions and record low unemployment, will aid adaption to climbing rates.
Finally, sound long-term demographic fundamentals remain, with steady demand growth forecast over coming years owing to urbanisation and population increases. Though immediate challenges exist, Spain's enduring housing shortage supports a soft landing rather than severe downturn for financial services firms targeting the Spanish market.
Government intervention
The government response also aims to smooth volatility, signalling a supportive environment for international companies expanding into Spain. Measures to assist vulnerable borrowers will likely have marginal impact given widespread forbearance policies already implemented by lenders. Nonetheless, this intervention demonstrates authorities are monitoring risks closely and willing to promote stability through policy if required.
Future outlook
In summary, while leading indicators show Spain's mortgage market has passed its zenith, the downward trajectory appears measured rather than precipitous. Though near-term affordability barriers may drive mild price declines, structural supply-demand dynamics and government supervision should contain abrupt downturn risks, supporting an environment conducive to international financial services firms entering and expanding within the Spanish market.
The consensus outlook is for stabilisation and muted growth over 2023-24 rather than contraction. The market appears headed for soft landing rather than crisis. This perspective accounts for both rising rate headwinds and inherent Spanish market strengths like strong tourism, urbanisation and proactive governance.
Though risks remain, especially if rates increase further, the market seems equipped to navigate a moderate slowdown rather than spectacular collapse. The outlook points to stabilisation rather than boom or bust, signalling significant opportunities for financial services, especially digital lending, in the Spanish market in coming years.
New entrants: Santander and MAPFRE's reverse mortgages
Santander and MAPFRE have recently received regulatory approval to offer reverse mortgages in Spain. This development follows an announcement made by both companies in the previous year, where they disclosed plans for a joint venture aimed at the exclusive distribution of reverse mortgage products through their commercial networks.
Market implications
The entry of Santander and MAPFRE into this space could act as a catalyst for other lenders to explore this untapped market, thereby increasing competition. This regulatory nod also hints at a potentially favourable environment for similar financial products. Furthermore, the relatively unfamiliar concept of reverse mortgages in Spain is likely to gain traction, given the strong brand presence of Santander and MAPFRE.
Strategic considerations for foreign lenders
For foreign lenders eyeing the Spanish market, understanding the nuances of consumer behaviour towards reverse mortgages could offer a competitive advantage, underlining the importance of comprehensive market research. Keeping abreast of the evolving regulatory landscape is also crucial, especially given the recent approvals for Santander and MAPFRE. Additionally, forming strategic alliances with key local partners may serve as an effective strategy for rapid market adaptation and share acquisition.
Conclusion
The foray of Santander and MAPFRE into Spain's reverse mortgage market marks a significant development that warrants the attention of foreign lenders. While it may be premature to predict the long-term ramifications, the move undeniably creates new opportunities for market research, strategic alliances, and a reassessment of the market potential for relatively novel financial products like reverse mortgages.
At iBerotech we support our digital lenders with market entry and operations. We have accumulated over a decade implementing operations for foreign investors in Spain and Portugal, with a track record of success.