Property prices in Spain increased 4.5% in Q3 from a year earlier, fuelled by the highest rise in new home prices in 16 years, according to official data published by the National Statistics Institute (INE) on Tuesday.

In the third quarter, new home prices rose 11% compared to the same three months last year due to declining supply, increased demand from foreign buyers, and a rise in costs stemming from inflation.

Furthermore, second-hand home prices increased by 3.2% compared to last year, Reuters news agency reports.

“The rise, especially in new housing, is largely due to the fact that we are still at very low levels of new housing production, below 100,000 new homes per year,” according to real estate analyst at Madrid-based broker Renta 4, Javier Diaz Izquierdo.

In addition, Spain approved 850,000 new licences to construct homes back in 2006 before the collapse of the property market, leading to the subsequent financial crisis.

The increase in prices was also fuelled by new home buyer profiles, who are typically less indebted and not as sensitive to interest rate rises and price hikes, Diaz went on to add.

“There are also lots of foreign buyers that drive prices higher in holiday areas,” he said.

Bank of Spain Governor Pablo Hernandez de Cos said last week that property prices needed to be closely monitored, yet the risk of them being over-valued has diminished.

Moreover, interest in house buying has surpassed pre-pandemic levels, online property portal Fotocasa said on Tuesday.

“We predict that by the end of the year, the price increase will be close to 5%,” stated Fotocasa spokesperson Maria Matos.