What would a worst-case second wave Covid scenario do to house prices? Look to Madrid for a clue

Melissa Lawford
·4-min read
Demonstrators in Madrid protest against the national Government, which declared a state of emergency in the capital to restrict mobility - Getty
Demonstrators in Madrid protest against the national Government, which declared a state of emergency in the capital to restrict mobility - Getty

The second wave of coronavirus has hit Madrid’s property market hard and there are signs the same could happen here.

Britain’s property market could be at a turning point after its summer “mini-boom” pushed house prices up to record highs. Pent-up demand seems to have run its course, agents have reported slowing buyer inquiries and now the country is grappling with the economic hit of new coronavirus restrictions.

Official statistics will be bolstered for several months as the sales agreed over the summer are processed. Analysis of the property market in Spain, which is several weeks ahead of Britain on the Covid curve, could give more insight on what the future holds for house prices.

New restrictions have curbed Madrid sales

As in the Britain, during the first lockdown, the Madrid market came to a halt.

Javier Guimón Ybarra, of Sotheby’s International Realty estate agents, said: “Activity stopped, information requests stopped, everything stopped.” Buyers who had put in offers before the pandemic began pulling out.

As lockdown eased, pent-up demand brought a spike in activity. This ran its course and the market returned to normal levels, said he said.

But then the case count escalated. Now, the Spanish government has invoked emergency powers and introduced additional restrictions that include only allowing people to travel in and out of the capital for work, education, medical purposes or emergencies.

House viewings are still allowed, but the restrictions mean that buyers from outside the area cannot travel in. Inquiries have nearly halved since the second wave began, said Mr Guimón Ybarra. Agreed sales are down 30pc to 40pc.

Knight Frank forecasts that transactions across Spain will be 28.6pc down year-on-year in 2020. In Madrid, it expects sales to be 26.9pc lower than in 2019.

Prices are falling

Government statistics show that between April and June, sale prices in Spain were down 1.7pc year-on-year while values in Madrid dropped by 0.8pc.

The drop in demand after the new restrictions were announced means buyers in the second hand sales market are now negotiating hard.

Carlos Zamora, of Knight Frank estate agents, said that before the pandemic started, buyers could normally negotiate 5pc off asking prices in Madrid. Now, they are getting 10pc to 15pc discounts.

The market is much more stable than it was in the wake of the financial crisis. “We are not seeing forced sellers like we did in the last crisis in 2007,” said Mr Guimón Ybarra.

As in Britain, Spanish lenders tightened their mortgage requirements in the wake of the financial crisis. Before coronavirus struck, buyers in Spain needed at least 20pc deposits, which means far fewer homeowners live in properties that they cannot afford.

But the economic impact of the restrictions will start to take its toll on the market, said Mr Zamora. He expects prices to fall by 6pc to 10pc.

Watch: What is Long Covid?

Prime resilience – for now

The market is not a blanket picture. Esther Gladen, of Lucas Fox estate agents, said coronavirus has affected each price bracket in different ways.

Those vendors at the most expensive end of the market, with properties worth more than €900,000, are unlikely to need to sell up, she said. The sector is also benefiting from new demand for larger homes with outdoor space in the wake of the pandemic.

In Spain, the rise of working from home has had the same effect on the property market as in England. “Many people like to move to the outskirts, people with children want big gardens, and in the centre of Madrid people are asking for terraces,” said Ms Gladen.

Demand is high in neighbourhoods such as Almagro, Justicia, and Salamanca, which was built in the 19th century and has grand, aristocratic boulevards, to the north of the city centre.

The suburbs to the north and north west of Madrid, such as Las Rozas, Aravaca, and Pozuelo de Alacon, are in demand from those seeking more space, said Mr Guimón Ybarra.

But the middle and lower sectors of the market, below the €900,000 mark, are struggling, said Ms Gladen. Demand has fallen most in this sector, and homeowners are more likely to be under financial pressure to sell. It is on these properties that buyers are getting big discounts.

International buyers are cut out

The prices of Madrid’s most expensive homes are insulated from big falls by a shortage of supply. But it is also exposed to the same drop-off in international buyers that has hit London. Foreign buyers have "disappeared", according to Mr Zamora.

In 2019, 39pc of Lucas Fox’s buyers in Madrid were from abroad, primarily from the United States and Latin American countries such as Mexico and Columbia, said Ms Gladen.

So far in 2020, the international share has dwindled to 33pc. But many of these purchases are pending until the buyers can visit in person.

What do you predict will be the impact of a second wave on Britain's property market? Share your view in the comments section below

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