- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
Are housing prices really rising fast?
submited on 16.07.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 16.07.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
After the growth of average housing prices in Bulgaria exceeded 20% in Q1 compared to the beginning of 2006 many analysts and market participants forecasted new records in 2007. Meanwhile, the asked housing prices in the premium segment in major cities reached EUR 1000-1200 as of May-June. The overview of the current situation is however subject to interpretation.
If we consider flats as an investment, their price changes must be compared to other investment alternatives. As we have already more than once commented, housing market after 2005 lags behind the development of the capital market- i.e., it is more profitable to invest in Bulgarian shares rather than residential property. Apart from this, even relatively the risk free bank deposits and holdings in mutual funds could bear annual return of 7-20% (without the most successful, which considerably exceed these levels) – with the liquidity being far better. That is why growth of housing prices up to 20% annually must not be regarded as “fast”.
If we are looking for some fundamental factors behind the change in housing demand, we must consider economic dynamics, income growth and migration of the population.
In the year to March the nominal volume of the economy reached record values of 15.5%. GDP measured in current prices, amounted to BGN 50.6 billion (almost EUR 26 billion). The relatively fast growth of investments (21.6% in real terms in the year to March) allowed real growth of the economy to remain almost unchanged in Q1 of 2007 (6.2%). Official wages grow at around 14% annually. Additionally, we must take into account migration towards major cities, Sofia in particular – which means that most financial resources for housing purchase are allocated there.
This means that for an economy like the Bulgarian, which for the moment is fast catching up income in Europe, prices of local resources – workforce and real estate – will also grow faster compared to the average growth of prices of tradable goods.
Meanwhile, the financial sector continued to allocate resources for housing purchase. This implies that foreign savings (“capital”) or “future income” is being added to current savings.
The growth of the total household credit has reached 40% on annual basis (the highest rate since February 2006). Meanwhile, housing credit continued to increase at 77% till May and reached values of BGN 4.2 billion (EUR 2.2 billion) during the same month (compared to around 2 billion in the beginning of 2006). Its share in the total household credit however slightly increased in April and May 2007. In this case, if we take for “normal” growth in the long term growth close to the nominal change in GDP (around 12-15% in Bulgaria), it might be expected that a considerable credit expansion would result in additional short term demand and thus immediate price adjustment. Hence, for this period “normal” changes in housing prices will be higher – and again changes in the range of 15-20% would not be considered surprising.
After a slight decrease to 8.4% in February, housing credit interest rates almost reached the levels registered in December and January. For the period November 2006 - May 2007 interest rates varied between 8.39% and 8.5%. The overall dynamics of the housing credit interest rates and the lack of considerable fluctuations in their values confirm our expectations of reaching a short-run equilibrium in the range of the current levels.
However, credit expansion affected the policy of the European Central Bank as well, making new interest rate hikes very probable. The registered record money growth in the Euro area is among the major reasons which made ECB opt for another interest rate hike – from 3.75% to 4.00% as valid from 13 June, despite that the consumer prices inflation varied in the range of the levels expected. The decision of ECB strongly influenced market conditions on interbank markets in the Euro area. The price of credit, measured through the 12-month Euribor, continued to rise, reaching 4.51% in June. In the six months from the beginning of the year the 12-month Euribor rose by almost 0.5%. Operating under a currency board, the Bulgarian economy continued to be strongly dependent on the monetary policy in the Euro area. In line with expectations the base interest rate in Bulgaria (BIR) kept rising – from 3.68% in April, through 3.81% in June, to increase above the 4% level in the beginning of July. All this will inevitably put pressure towards housing credit interest rates hikes and could therefore “cool” the otherwise strong residential property demand in major cities.
If we consider flats as an investment, their price changes must be compared to other investment alternatives. As we have already more than once commented, housing market after 2005 lags behind the development of the capital market- i.e., it is more profitable to invest in Bulgarian shares rather than residential property. Apart from this, even relatively the risk free bank deposits and holdings in mutual funds could bear annual return of 7-20% (without the most successful, which considerably exceed these levels) – with the liquidity being far better. That is why growth of housing prices up to 20% annually must not be regarded as “fast”.
If we are looking for some fundamental factors behind the change in housing demand, we must consider economic dynamics, income growth and migration of the population.
In the year to March the nominal volume of the economy reached record values of 15.5%. GDP measured in current prices, amounted to BGN 50.6 billion (almost EUR 26 billion). The relatively fast growth of investments (21.6% in real terms in the year to March) allowed real growth of the economy to remain almost unchanged in Q1 of 2007 (6.2%). Official wages grow at around 14% annually. Additionally, we must take into account migration towards major cities, Sofia in particular – which means that most financial resources for housing purchase are allocated there.
This means that for an economy like the Bulgarian, which for the moment is fast catching up income in Europe, prices of local resources – workforce and real estate – will also grow faster compared to the average growth of prices of tradable goods.
Meanwhile, the financial sector continued to allocate resources for housing purchase. This implies that foreign savings (“capital”) or “future income” is being added to current savings.
The growth of the total household credit has reached 40% on annual basis (the highest rate since February 2006). Meanwhile, housing credit continued to increase at 77% till May and reached values of BGN 4.2 billion (EUR 2.2 billion) during the same month (compared to around 2 billion in the beginning of 2006). Its share in the total household credit however slightly increased in April and May 2007. In this case, if we take for “normal” growth in the long term growth close to the nominal change in GDP (around 12-15% in Bulgaria), it might be expected that a considerable credit expansion would result in additional short term demand and thus immediate price adjustment. Hence, for this period “normal” changes in housing prices will be higher – and again changes in the range of 15-20% would not be considered surprising.
After a slight decrease to 8.4% in February, housing credit interest rates almost reached the levels registered in December and January. For the period November 2006 - May 2007 interest rates varied between 8.39% and 8.5%. The overall dynamics of the housing credit interest rates and the lack of considerable fluctuations in their values confirm our expectations of reaching a short-run equilibrium in the range of the current levels.
However, credit expansion affected the policy of the European Central Bank as well, making new interest rate hikes very probable. The registered record money growth in the Euro area is among the major reasons which made ECB opt for another interest rate hike – from 3.75% to 4.00% as valid from 13 June, despite that the consumer prices inflation varied in the range of the levels expected. The decision of ECB strongly influenced market conditions on interbank markets in the Euro area. The price of credit, measured through the 12-month Euribor, continued to rise, reaching 4.51% in June. In the six months from the beginning of the year the 12-month Euribor rose by almost 0.5%. Operating under a currency board, the Bulgarian economy continued to be strongly dependent on the monetary policy in the Euro area. In line with expectations the base interest rate in Bulgaria (BIR) kept rising – from 3.68% in April, through 3.81% in June, to increase above the 4% level in the beginning of July. All this will inevitably put pressure towards housing credit interest rates hikes and could therefore “cool” the otherwise strong residential property demand in major cities.
What is your opinion about this article?
0 agreed
0 disagreed