Spain is experiencing a housing crisis that prevents access, especially for many young people, to owning a property. The lack of new developments, together with the voracious appetite of investment funds and individuals to acquire houses and apartments to do business, has led to fewer and fewer houses available and those that remain being more expensive. But the problem is not only the increase in real estate prices: the real cost of buying a home is much higher than what appears in the advertisements.
The usual thing for someone who wants to buy a home is to resort to a mortgage. Financing, necessary in the vast majority of cases to face the payment of 200,000 euros, 300,000 or even higher amounts, allows access to the property, but also implies assuming a heavy financial burden for decades that must be returned to the bank.
To illustrate with numbers, buying a home for 300,000 euros in a large city, financed with a 30-year mortgage of 240,000 euros with a fixed rate of 2.9%—the average price according to the latest data from the INE—means paying around 120,000 euros in interest alone. That is, the buyer pays practically half the additional amount. But that is not the only extra cost that must be taken into account.
Taxes and associated expenses must be added to the purchase, which are paid immediately. In a home of that amount, the Property Transfer Tax (or VAT on new construction), together with the notary, registration and appraisal, raise the bill by around an additional 10% or 12%. This represents between 30,000 and 36,000 euros more. Just with these concepts—price, taxes and interest—the total cost of buying that home is already around 450,000 euros.
From there, other expenses come into play. The IBI can mean between 400 and 600 euros per year in a city like Madrid, which is equivalent to about 15,000 euros in 30 years. Insurance linked to the mortgage, such as home and life insurance, can add another 15,000 euros in that same period. Community expenses of about 80 euros per month would add another 28,800 euros in 30 years. If all these elements are added, the approximate total cost of a 300,000 euro home can easily reach more than 500,000 euros over three decades. All of this without taking into account possible renovations and the purchase of furniture and appliances if the home does not include them or if you want to give it a facelift. Maintenance costs are not included either.
According to Jordi Sánchez, online sales director at GoHipoteca, one of the most frequent mistakes made by first-time buyers is focusing on the interest rate when the main obstacle is another. “The problem is not optimizing the mortgage, it is accessing it,” he points out. In practice, most buyers are conditioned by two factors: previous savings and the banks’ risk criteria.
To purchase the home mentioned in the example, a buyer needs to have at least between 90,000 and 100,000 saved previously, which represents the 20% that the bank does not finance, plus the purchase and sale expenses. A barrier that leaves out a good part of the population. When you already have that money to access the mortgage, another common mistake is to only calculate the monthly payment. Because the real financial burden is much broader. “The correct analysis is not how much you can pay per month, but how much you can assume without compromising your financial stability,” explains Sánchez.
As mentioned above, the IBI, community expenses, maintenance, supplies and insurance are added to the mortgage payment. Together, these costs can significantly alter a household’s ability to pay. For this reason, although banks usually set as a reference that the fee does not exceed between 30% and 35% of income, experts recommend going further and ensuring that you have savings of between 20% and 25% of income that allows you to absorb unforeseen events without compromising financial stability.
“The first step before looking for a home is to know your real debt capacity. It is not only about being able to pay the mortgage today, but also about doing so comfortably over time and without putting financial stability at risk. Many buyers do not negotiate or compare the conditions of the mortgage, and linked products such as insurance or cards can make the operation more expensive. The total cost of a home can increase considerably when all the associated expenses over time are taken into account, which shows the importance of having a complete view of the expense beforehand. to make the purchase decision,” adds Laura Martínez, spokesperson for iAhorro.
An investment not always safe
The problem in many cases is aggravated when the idea behind purchasing a home is to invest in renting it. It also explains, in part, the upward pressure on rental prices in many cities. To achieve an annual profitability of around 5%, an owner who buys the apartment in the example for 300,000 euros would need to put the rent at around 1,300 euros per month. And that is without taking into account the rest of the expenses or taxes, which reduce the final profitability.
With those 1,300 euros per month, it would take the owner about 27 years to recover the cost of the property and the interest on the mortgage, considering that it remains rented throughout the entire period. If all the costs of insurance, taxes, maintenance and possible renovations are taken into account, it would take between 30 and 35 years to recover the full cost.
Common mistakes include overestimating the revaluation, underestimating the deadlines or ignoring the real costs. The consequence, low or even negative profitability. “Compared to other assets, such as a global equity index, housing has high concentration, low liquidity and high costs. The real return can be moderate, and many poorly planned operations generate zero or negative profits. In the long term, inflation can make it appear that more has been earned than what has actually been earned, so it is important to always analyze the results in real and not nominal terms,” explains Laureano Gris, partner at the financial advisory firm Norz Patrimonia.
The impact of total costs also affects those who purchase a home thinking of reselling in the short or medium term. A person who buys a home for 300,000 euros and sells it a few years later for 350,000 may think that he has earned 50,000 euros along the way, but surely not only will he not gain anything, but he will also lose money.
A buyer who purchases a home for those 300,000 euros contributes an initial 90,000 euros (between down payment and expenses). If you sell the house five years later, you will have already paid close to 60,000 euros in mortgage payments. Of that amount, approximately 33,000 euros correspond to interest and about 27,000 euros to capital amortization. Added to this are some 13,000-15,000 euros in recurring expenses (IBI, insurance, community and maintenance). In total, the real cost assumed in that period exceeds 135,000 euros.
At the time of sale, in addition, there would still be around 210,000 and 215,000 euros of mortgage to be returned to the bank, to which are added the possible exit costs: agency commissions, the municipal capital gain and, where applicable, personal income tax for the profit obtained. The bank may also apply a fee for early repayment of the mortgage – which can reach up to 2% during the first years in fixed-rate mortgages.
With all this, the owner would need to sell the home for around 380,000 euros simply to avoid losing money. That is, a revaluation close to 25% in just five years. If the objective is to obtain a net profit of around 30,000 euros, the sale price should be above 410,000 euros, which implies increases of more than 35%. In annual terms, this requires sustained growth of around 5% to 7%, a scenario that, as experts warn, is not always met.
Although historically the trend in housing prices in Spain has followed an upward and inflationary path, there have also been periods of falling prices of real estate assets. “The great tradition of home buying in Spanish culture tends to make it clearly overvalued compared to other alternatives. Additionally, the incorrect expectation or belief that housing always goes up makes it seem like the safest investment,” says the Norz Patrimonia advisor.
In this context, the comparison with other investment alternatives helps to measure the opportunity cost. A buyer who spends 90,000 euros on the down payment and expenses of a home and manages to sell five years later with a net profit of about 30,000 euros, obtains an approximate profitability of 33%, equivalent to about 6.6% annually. That same capital invested in a fund indexed to an index such as the S&P 500, which groups together the 500 largest companies in the United States — with average historical returns of between 7% and 10% annually — would have generated between 36,000 and 50,000 euros of profit in that same period. That is, a cumulative profitability of between 40% and 60%. Of course, investing in the market is also subject to risks, the figures are historical data and are not guaranteed.
Experts point out that this does not mean that housing is a bad investment, but they do question one of the most deeply rooted ideas in the Spanish imagination: that buying a home is always the most profitable option. In an environment of high prices, increasing costs and increasingly demanding conditions of access to housing and financing, understanding the real cost (and also the opportunity cost) is key. Because, beyond the emotional or vital component, purchasing a home is one of the most important financial decisions of a life, and not always the most profitable.
