Is it the right time to buy a flat in Madrid?
Read this article to learn why it is an excellent time to buy a flat in Madrid and how investment prospects in Madrid compare to other cities.
Are prices too high?
After years of waiting for prices to recover from the financial crisis of 2008, Madrid real estate prices trended strongly up in 2017 and 2018. As we finish out the third quarter of 2019, people are starting to ask us, “Have prices recovered too much?”
Our response to these people is: ” You are not asking the right question.”
As you can see in our 1H2019 Madrid Real Estate Report, prices did sharply increase in 2017 and 2018:
However, the above graph does not tell the whole story. There are two components that need to be considered when looking at current Madrid real estate prices:
- Structural change
Prices have clearly recovered from the crisis. On average, they are now only 5.5% below the peak levels they achieved in 2Q07. People worry that since they are so close to the past peak, they are bound to fall. However, this isn’t taking into account that the Madrid real estate market is undergoing significant structural change.
Structural change causes a permanent change in the intrinsic value of an asset (in this case, your flat in Madrid is that asset). There are a number of factors that are driving structural change in the Madrid real estate market.
The construction sector appears to have learned its lesson
The high prices seen in 2007 were largely fueled by a rapid increase in the construction sector. It was simple supply and demand: they kept building more new flats in Madrid. When the world financial crisis hit, GDPs around the world contracted because what people thought were sovereign financial systems were actually linked together quite strongly. Spain’s GDP, which ultimately reflects consumer buying power, contracted. At the same time, the market was filled with new apartments. In result, property prices plummeted. The situation is very different today. Spain continues to have one of the best performing economies in Europe.
At the same time, the construction sector appears to have learned its lesson. As you can see in the below chart, it has one of the lowest rates of housing development in Europe. In Madrid, the new construction is even less than in the rest of Spain.
Spain’s population is again increasing
Even more interestingly, Spain’s population is again increasing. After 2012 the Spanish population decreased every year. The tide recently turned. The population is again increasing, most of it due to foreigners moving to the country. Part of this is due to Spain’s new visa laws, created to attract foreign talent and capital. Another part is due to political instability in other parts of the world, such as Venezuela, Mexico, the UK and even the US.
Additional factors driving structural change
This blog has written about several other trends that we believe are driving the positive structural change in Madrid real estate prices:
- The City of Madrid’s Government has been streamlining regulation, lowering taxes and improving the city’s infrastructure. This is attracting foreign investment and leading to upward pressure on housing prices.
- The business exodus from Cataluña is driving many people to Madrid. We don’t foresee a resolution to this crisis.
- The British are the largest foreign investors in Spain, representing roughly 15% of investment. As Brexit looms closer, many people from the City of London are exploring owning Madrid property so they will be able to continue living and working in the EU. Moreover, EU financial service companies that can no longer process euro based transactions in the UK are moving to major European capitals, including Madrid.
- There has been a dramatic increase in the quality of Madrid real estate. According to Moving2Madrid’s CEO Pierre Waters, “Compared to other European capital cities, the prices in Madrid are still relatively low. What is different now is that the quality of the apartments has vastly improved. Ten years ago, the state of the average rental apartment in Madrid was just bad. Most apartment interiors were 20-30 years old, and sorely in need of refurbishment. Prices have had to increase to give landlords the incentive to refurbish, and bring the apartment stock to the level of a modern European capital. So yes, prices are increasing, especially in the center. But they are still quite cheap, compared with the prices in the center of other cities. People that complain about the recent price increases are taking the luxury of living in a highly walkable, capital city for granted. We’re not even close to a ‘bubble’.”
Do you want to learn more about the structural change in Madrid’s real estate market? If so, email us your questions today at: email@example.com
How do prices in Madrid compare with those in other European cities?
Rate of price appreciation
As you can see in the following chart (taken from Deloitte 2019 Property Index), the property price appreciation in Madrid was very average, when compared with other major European cities in the same time frame. Key cities like Paris and Amsterdam saw percentage changes in their property prices much greater than that experienced in Madrid.
Aggregate property prices
Taken on average, property prices in Madrid are still some of the lowest in Europe.
Rental yields are the biggest factor when evaluating whether a flat in Madrid, or any other city for that matter, represents a good investment opportunity. The following factors have contributed to Madrid rental yields increasing quickly vis-à-vis yields in other major European cities:
- Although property prices have risen in Madrid, they have risen even faster in key cities like Paris and Amsterdam.
- Spain’s strong GDP performance has led to an increase in the rental rates for flats in Madrid.
- Madrid’s vibrant tourism sector, and the increase in Airbnb properties, has caused rental rates to increase relatively dramatically in certain Madrid neighborhoods.
As a result, rental yields in Madrid are again the highest among major European cities.
What about interest rates?
Interest rates are one of the key factors when it comes to buying a flat in Madrid. Spanish interest rates are tied to EURIBOR, which is at an all time low. In fact, it is so low that we are recommending our clients finance 50% of their property purchases with Spanish mortgages, even if they have the cash in hand to buy the property outright. The icing on the cake is that Spain recently changed their mortgage laws to make them more favorable to consumers.
If you want to learn more about this, we invite you to read: How to get a Spanish mortgage as a foreign buyer.
Conclusion: Now is the time to buy a flat in Madrid!
If you want to purchase a flat in Madrid, particularly for investment purposes, now is an excellent time. We recommend that you:
- Finance 50% of the purchase with a Spanish mortgage to take advantage of interest rates being at all time lows.
- Refurbish the property to take advantage of the structural change happening in the market.
- Rent your property to profit from Madrid’s very high rental yields. If the purchase price of your property is between 300-700k€, take advantage of the current “sweet spot” for Airbnb returns and rent it short term. Our clients earn, on average, a 6% net return when they rent their properties on Airbnb.
- Take some time to enjoy your property and Madrid’s excellent lifestyle.
Do you need help searching for and/or purchasing your ideal flat in Madrid? If so, BOOK A FREE CONSULTATION TODAY with one of our property search experts.