Shrinking population and improved economy will lead to rising house prices in Spain, says Moody's

Brighter economic prospects for younger Spaniards will mean property prices will rise, despite population shrinkage.

Credit rating agency Moody’s has issued a report this week examining the effects of population growth and economic recovery on five European housing markets, finding that Spanish property prices are set to rise in response to changing circumstances.

The report suggests that Spain’s falling population, with the number of people living in the country set to shrink by about 1.3% between now and 2020, will actually serve to increase property prices, rather than see prices fall…

According to the analysts, the impact of fewer people in Spain – a phenomenon that ordinarily leads to falling prices because demand for housing drops away – will be offset by the growing strength of the economy, which is set to outperform many others in Europe over the next two to three years.

Moody’s data suggests that the 25-35 age group is going to shrink, which “in and of itself may weaken housing demand in Spain”, said the report. However, the caveat to that is the strengthening economy, which will deliver the most benefits to this very demographic.

As more jobs are created and more and more young people living in Spain feel financially secure, demand for property among first-time buyers will rise, thus offsetting any downward pressure on housing prices, said the report.

“The 25-35 age group will benefit most from improved income prospects in future and increased mortgage lending activity, which could lighten the pressure on house prices and subsequently residential mortgage-backed securities’ collateral performance,” said Moody’s Assistant Vice President, Greg Davies.

Davies added that better employment and income prospects in Spain will “improve first-time buyers’ affordability, while house prices are still low and banks are increasing their focus on mortgage lending.”

This forecast has already been brought to bear in some parts of Spain, notably the Costa del Sol where house price increases have been seen for the past 15 months and mortgage lending has risen for three straight quarters – often driven by the very demographic that has shrunk in recent years: the younger generation, many of whom fled Spain during the last recession but have begun to return as the country’s economic outlook improves.