- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
Housing or stocks
submited on 14.02.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 14.02.2008 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Housing estate prices continued to climb in 2007 as well, as the average pace up to the moment is around 34%, as compared to a year earlier. These facts must reassure investors in Bulgarian assets after the stock exchange decline in recent months. We must however take into consideration that the main contribution belongs to internal urban housing demand, whereas prices in holiday resorts, where buyers are predominantly foreigners, stagnated.
This structure of demand allowed for the market to grow irrespectively of the mortgage crisis in the USA and the following contraction of global demand under rising interest. This was demonstrated in the last quarter as well, when the average housing price growth accelerated to 8.8% (relative to Q3), reaching BGN 1217 per sq.m. in nominal terms. Prices in the big cities accounted for a condiderable growth, as in Sofia and Varna nominal change was higher than the country average. Among the six biggest cities fastest growth achieved housing estates in Russe – growing at 14.9% relative to the previous quarter.
Sofia continued to sustain strong price growth despite the considerably higher nominal base, as compared to the other big cities. The housing market in the capital is most heavily dependent on credit dynamics in the mortgage segment. Housing credit growth decelerated to 64% on annual base as of end-December, after reaching its 80% climax in August. In nominal terms however more than BGN 2.1 billion financed housing purchases.
Nominal differences between Sofia and the other regional centers remained significant. One square meter housing property in the capital “buys” 3 square meters area in Kyustendil. According to the official statistics prices of housing estates in Sofia are some 40% higher than the second biggest city in the country Plovdiv. None of the regional cities had a decline in price growth, whereas growth in six cities is double digits.
In the same time the value of stocks for 2007 increased at some 44% (estimated via the SOFIX index). If we however take into account the developments up to the current moment, the growth dropped down to 15.5%. The decline relative to the peak moment in the mid – October is around 28%. For the last two years however stocks still produce better return than housing purchases (country average).
Still prices of both types of assets grow at faster pace than consumer prices. On a macro scale this is related to the money supply growth rate. Currencies in circulation, as well as credit, grow at rates, considerably higher than the nominal growth of the economy. The monetary base expended at almost 30% within a year – following the increasing foreign investment inflow. In a closed economy this would lead to overall price inflation, referring to all goods and services. With regard to international competition however the increased purchasing power could be met by the growing supply of import at international prices. This cannot happen with non-tradable goods and local assets. In the short term the supply of housing and investment assets is relatively constrained and boosted demand reasonably leads to rising prices.
If we view “working force” as a local asset due to the weakly spread alternative for workers’ import from poorer countries, we can register similar trend. In the last year GDP will probably grow at some 15% in nominal terms, while average wages – at some 20-22%. Within different segments growth can be even higher, considering specific “deficit” of employees with certain professions and skills.
Finally we must also take into account the fact that not the entire population is investing in assets as of particular moment – these by rule are people with higher income and accumulated wealth. They often make decisions for investing the whole additional income in a particular period, i.e. they do not increase their consumption for current needs. If they as of the moment can save 30% of their income, with a 30% growth in a given period the savings opportunity doubles – consequently demand for investment assets. Thus for asset market developments – not only estates, but also financial – we must take into account income dynamics in income namely of this group of people.
This structure of demand allowed for the market to grow irrespectively of the mortgage crisis in the USA and the following contraction of global demand under rising interest. This was demonstrated in the last quarter as well, when the average housing price growth accelerated to 8.8% (relative to Q3), reaching BGN 1217 per sq.m. in nominal terms. Prices in the big cities accounted for a condiderable growth, as in Sofia and Varna nominal change was higher than the country average. Among the six biggest cities fastest growth achieved housing estates in Russe – growing at 14.9% relative to the previous quarter.
Sofia continued to sustain strong price growth despite the considerably higher nominal base, as compared to the other big cities. The housing market in the capital is most heavily dependent on credit dynamics in the mortgage segment. Housing credit growth decelerated to 64% on annual base as of end-December, after reaching its 80% climax in August. In nominal terms however more than BGN 2.1 billion financed housing purchases.
Nominal differences between Sofia and the other regional centers remained significant. One square meter housing property in the capital “buys” 3 square meters area in Kyustendil. According to the official statistics prices of housing estates in Sofia are some 40% higher than the second biggest city in the country Plovdiv. None of the regional cities had a decline in price growth, whereas growth in six cities is double digits.
In the same time the value of stocks for 2007 increased at some 44% (estimated via the SOFIX index). If we however take into account the developments up to the current moment, the growth dropped down to 15.5%. The decline relative to the peak moment in the mid – October is around 28%. For the last two years however stocks still produce better return than housing purchases (country average).
Still prices of both types of assets grow at faster pace than consumer prices. On a macro scale this is related to the money supply growth rate. Currencies in circulation, as well as credit, grow at rates, considerably higher than the nominal growth of the economy. The monetary base expended at almost 30% within a year – following the increasing foreign investment inflow. In a closed economy this would lead to overall price inflation, referring to all goods and services. With regard to international competition however the increased purchasing power could be met by the growing supply of import at international prices. This cannot happen with non-tradable goods and local assets. In the short term the supply of housing and investment assets is relatively constrained and boosted demand reasonably leads to rising prices.
If we view “working force” as a local asset due to the weakly spread alternative for workers’ import from poorer countries, we can register similar trend. In the last year GDP will probably grow at some 15% in nominal terms, while average wages – at some 20-22%. Within different segments growth can be even higher, considering specific “deficit” of employees with certain professions and skills.
Finally we must also take into account the fact that not the entire population is investing in assets as of particular moment – these by rule are people with higher income and accumulated wealth. They often make decisions for investing the whole additional income in a particular period, i.e. they do not increase their consumption for current needs. If they as of the moment can save 30% of their income, with a 30% growth in a given period the savings opportunity doubles – consequently demand for investment assets. Thus for asset market developments – not only estates, but also financial – we must take into account income dynamics in income namely of this group of people.
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