Can Spain's economy survive rising costs and a worsening housing crisis?

Download the PDF of the 'Spain Economics & Real Estate Investment Outlook 2026 Spotlight' report here.

The Spanish Economy

Economic Growth and Fiscal Dynamics

The Spanish economy has witnessed substantial nominal growth, but the country faces a dilemma: while GDP has grown by half a trillion euros since 2018, this increase masks underlying issues of economic inequality and a diminishing purchasing power for many citizens. 

GDP per capita has increased by 30% from 1990 to 2019, but inflation and rising costs are eroding this growth in real terms. The European Central Bank’s (ECB’s) inflation target of 2.2% seems overly optimistic, with inflation figures still fluctuating, despite positive trends in early 2025.

On the fiscal front, Spain has made progress in reducing its debt-to-GDP ratio, though public debt has still grown substantially in absolute terms. 

From 1.2 trillion euros in 2018, debt is projected to rise to EUR 1.7 trillion by 2026. This growth in debt is concerning, especially when factoring in Spain’s growing per capita debt, which now stands at EUR 34,000 per inhabitant - an increase of nearly EUR 10,000 per person since 2018. 

While Spain's fiscal deficit is moderating, the gap remains above the European Union's (EU’s) target, reflecting the broader challenges of achieving fiscal balance in modern economies.

Unemployment and Labour Market Challenges

Spain’s unemployment rate has seen a marginal decrease, dropping from 10.45% in Q3 2025 to reach 9.93% in Q4, but the true state of the labour market is less optimistic. 

Structural unemployment remains a pervasive issue, with figures indicating a potential unemployment rate as high as 12-15% when considering inactive workers and those in temporary employment schemes. 

Furthermore, Spain continues to face significant challenges in terms of labour force participation, especially for those over 50 and for workers in low-productivity sectors.

Despite these hurdles, there has been some positive news regarding social security affiliations, particularly among foreign nationals, who now make up a significant portion of the workforce. 

However, the country's reliance on low value-added sectors like tourism and manufacturing remains a concern for long-term economic sustainability and competitiveness.

Public Spending and Taxation

Public spending has surged in recent years, with an increase of EUR 263 billion since 2018. This has accounted for a substantial portion of the country’s economic growth, contributing to an increase in the tax burden. 

Tax revenue has grown by nearly EUR 93 billion over the same period, highlighting the pressure on households and businesses. 

The increase in taxes, although necessary to support government spending, is a double-edged sword for the Spanish population, as many are already feeling the strain of rising costs, especially in essential goods like food and housing.

Moreover, much of the public spending has been classified as unproductive, particularly in political or administrative expenditures. The challenge for the government will be to balance these expenditures while ensuring that the growth in tax revenue can support long-term economic stability without stifling growth.

The Spanish Real Estate Market

Prices, Demand, and Financing

The Spanish real estate market is undergoing a major transformation, driven by a sharp imbalance between supply and demand. With new housing construction far below the required levels to meet demand, housing prices have skyrocketed, particularly in major cities like Madrid and Barcelona. 

The production of new homes is at an all-time low, with only around 100,000 homes being completed annually, far below the 125,000 homes that are planned. This shortage of new housing, combined with increasing construction costs, has led to a surge in prices for both buying and renting properties.

These supply-side constraints have led to a more competitive market, where developers are increasingly relying on alternative financing options due to the reluctance of traditional banks to fund land acquisition and development.

However, the shift towards alternative financing is not without its challenges. While these financing options offer more flexibility, they come with a higher cost, making projects more expensive to fund. 

Construction Costs and Land Development

The rising costs of construction materials, such as cement and aluminium, are further exacerbating the situation. These materials have seen price hikes of over 40%, leading to a significant increase in overall construction costs. 

In some regions, the cost of building a new home has surged by over 50%, and this trend is unlikely to reverse in the short term. With costs already at a high point, new regulations and building codes, driven by EU sustainability directives, will further increase these expenses.

The shortage of land for development is also a critical issue, especially in areas like Madrid, where the demand for residential property far exceeds supply. Urban planning and zoning regulations have been slow to adapt to current needs, with some projects taking up to 10, 20, or even 30 years to complete.

In response, the Spanish government is looking to reform urban planning laws to accelerate development and improve the efficiency of land use. 

These reforms include the potential to convert office spaces into residential units, providing a partial solution to the housing crisis, but they still fall short of addressing the larger issue of affordable housing.

The Road Ahead: Policy Reforms and Global Trends

As Spain grapples with these complex economic and real estate challenges, the need for structural reforms is more urgent than ever. The country’s reliance on sectors with low productivity, its slow-moving construction industry, and its inability to meet housing demand are all factors that will require strategic, long-term solutions. 

The proposed reforms in urban planning and housing policy offer some hope, but their success will depend on the political will to implement these changes swiftly and effectively.

On the global stage, Spain’s real estate market is seen as an attractive investment destination, particularly in sectors such as student housing and hotels. However, with increasing competition from other European markets and the challenges posed by political and economic uncertainty, investors will need to be cautious. 
 

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These insights were shared during the Spain Economics & Real Estate Investment 2026 roundtable, co-hosted by Stoneweg and featuring participation from Adolfo Favieres (BlackRock), Alfonso Agulló Torres (Santander AI & Deva Capital), Ariadna Nijssen (Stoneweg), and Eduardo Boveda Damborenea (Victoria Asset Management).