The real estate sector is weak but a long way from what we saw in the financial crisis

The worst macroeconomic situation is beginning to be felt in the real estate sector. According to the Registry of Real Estate Statistics published this week by the Association of Registrars, home purchases in Spain fell by 6.7% in May compared to the same month of 2022, while the drop in the number of mortgages granted is much more severe, cratering by almost 25 percent, with 12,500 less applications processed.

Alberto Matellán, chief economist at MAPFRE Inversión, explains that the real estate sector is one of those most affected by interest rate hikes, and what we’re now seeing is that very impact. “Transactions grind to a halt and prices start to fall,” he noted.

However, he believes that the situation is different from that experienced around 2007 because the greatest impact is on balance sheets.

"Real estate holdings are assets and many companies and families have them on their balance sheets, while mortgages constitute liabilities. A bank may have both real estate and mortgages in its assets. The problem is that when properties fall in value, balance sheets fall out of sync and solvency problems can arise," he explains. "That's what happened in 2007 and 2008, but I don't think it's what’s happening now, for a number of reasons. The first is that the balance sheets are healthier. The second is that liability levels are lower, and the third is that the price falls right now are less pronounced. It's a problem, but it’s already been factored in."

Not all asset classes are performing similar to real estate. Equities closed out the first half of the year with very attractive yields, both in the United States and Europe, where Matellán believes there are still further gains to be made. “It's turning out to be a very good year, despite pessimism, in other asset classes too,” he points out, and specifies that, although in the United States, the cause is a small group of companies, in Europe the increases are “more balanced."

However, future performance will probably be worse than what’s been recorded so far, because of the latest “not so cheery” macroeconomic data. MAPFRE’s chief economist points to liquidity and earnings stability as support pillars for this optimism.

Just a few weeks after companies reported their Q2 results, the forecast is for profits to be positive, although “slightly lower than previous quarters.” "Numerous sectors gives us reason to be optimistic. There is solid reasoning behind the thinking that many companies can maintain profits, although a minor impact is expected due to the macroeconomic situation," says Matellán.

 

Growth is the greatest risk for equities

For Matellán, the main risk facing equities is economic growth, with worrying data in Europe (especially in Germany), while the chief economist is more optimistic about the United States.

In any case, he pointed out that a recession is not only about two consecutive negative quarters, but “a very significant change in economic dynamics that goes from a virtuous circle to a vicious one.” “If we work with that definition, the likelihood of recession in the United States is low, and in Europe, a little higher,” he explains.

A possible sudden change by central banks (or a perception thereof) may pose another major risk to equity markets, whether in the face of monetary tightening or more accommodative policies.