The European Central Bank has raised interest rates for the first time in a year, making mortgages more expensive just as Spanish house prices continue rising on the back of tight supply.

The European Central Bank has raised its benchmark interest rate (deposit facility) by 25 basis points to 2.25%, in response to renewed inflationary pressure caused largely by higher energy prices and the war in the Middle East. The main refinancing fixed rate has risen to 2.40%, effective from the 17th of June.

The move was widely expected, but it still matters for the Spanish property market. Higher interest rates make mortgages more expensive, reduce buyer affordability, and force banks to be more selective about who they lend to.

Experts quoted by idealista/news expect the Euribor to remain around its current level of 2.8%, or possibly move closer to 3% if markets price in further rate rises. Fixed and mixed-rate mortgages are also likely to become a little more expensive, though competition between banks may limit the immediate impact.

Existing borrowers on fixed-rate mortgages are largely protected. The squeeze will be felt more by buyers needing new finance, borrowers on variable rates, and those on mixed mortgages moving into the variable-rate phase.

The latest housing market figures show sales falling year-on-year in Q1 by between 8% and 11% (depending on the source) but prices rising by 7% (notaries). So sales were falling and prices rising before this latest increase in borrowing costs.

The bigger problem is still prices

Higher borrowing costs usually cool demand, so sales will likely continue to fall this year, but few analysts expect a sharp fall in Spanish house prices. Why? Because Spain still has a chronic shortage of homes for sale, especially in the areas where demand is strongest.

That supply shortage continues to support prices, even as mortgage affordability gets worse. In other words, buyers may face the worst of both worlds: more expensive finance and no meaningful discount on the price of property.

Several experts argue that the real problem is no longer the mortgage rate, but the price of the homes themselves. In many popular markets, prices have risen so far that middle-income buyers are increasingly priced out, even before banks apply tougher lending criteria.

More rate rises possible

There is no clear consensus on what the ECB does next. Some analysts expect two more rate increases this year, which could take the benchmark rate to 2.75% by the end of 2026. Others think the ECB should pause and see whether the inflation shock proves temporary.

The ECB has also revised its economic forecasts, now expecting higher inflation and weaker growth than previously forecast. That combination is awkward for policymakers and uncomfortable for property buyers.