Is Spain's property market on the brink of a bubble?

The Bank of Spain recently issued a cautionary note, indicating that signs of a property bubble may be emerging in the country. As house prices soar to historic levels, the question arises: is Spain witnessing a real estate bubble, and if so, could it burst within the next year?

A property bubble is characterized by a rapid increase in housing prices, driven by heightened demand and speculative behavior. Typically, this phenomenon occurs when housing prices outpace wage growth, resulting in properties being sold for more than their intrinsic value. Ultimately, the bubble is expected to burst, leading to a sudden decline in housing prices, often when demand wanes and supply escalates.

Current conditions in Spain suggest that the housing market may be nearing a critical juncture. Over the past few years, property prices have surged, contributing to a housing crisis where many are priced out of the market. Recent reports highlight that home sales are breaking records in a market plagued by a significant supply deficit. The Bank of Spain has noted that property prices are overvalued by up to 8.5 percent.

Moreover, the central bank highlighted a housing shortage estimated at approximately 450,000 homes. In the latter half of 2024, a remarkable 367,000 property transactions occurred, indicating robust demand. This trend carried into early 2025, with 183,140 sales recorded between January and March—an unprecedented figure for the beginning of the year since 2007, a period synonymous with a previous property bubble.

As experts assess the situation, many attribute the early 2025 sales surge to a phenomenon known as the "rush effect." This occurs when potential buyers feel compelled to act quickly for fear of missing out on further price increases. "Prices are rising very quickly, and the market is very tight," noted José García Montalvo, an economics professor at Pompeu Fabra University. He emphasized that this urgency drives many to purchase now, fearing they may not afford a home later.

María Matos, Director of Research at Fotocasa, expressed that if the monthly transaction trend of over 60,000 continues, 2025 could become the best year for real estate since 2007. However, the existence of a property bubble remains a topic of debate among analysts.

Some experts assert that the current price per square meter in major Spanish cities exceeds levels seen during the last bubble, suggesting that buyers' salaries have also risen, preventing real estate assets from being deemed overvalued. Additionally, the current household debt levels are not concerning, unlike during the 2007 bubble. Some argue that rising prices are more closely linked to supply constraints rather than speculative buying.

José Manuel González Robles, President of the Association of Real Estate Agents of Biscay, dismissed concerns of a bubble, citing a fundamentally different economic landscape compared to the 2008 crisis. "There’s no risk, none, for a simple reason: the 2008 bubble and the financial crisis were generated because the banks cut off the financing tap," he explained. Presently, debt levels are low, and savings are at an all-time high.

González further pointed out that the previous crisis was marked by an excess of new-build housing, a scenario that does not exist today. Meanwhile, construction remains at a fraction of previous levels, with banks now exercising greater caution in lending.

In conclusion, while Spain undeniably faces a severe housing crisis and shortage, the current climate of banking stability and enhanced regulatory oversight may mitigate the risk of a property bubble in 2025. The situation warrants close monitoring as the market evolves.