New real estate bubble? It depends on who you ask

Romania's GDP has been outperforming those of neighbouring CEE countries as of last year, but its Central Bank warns that the mortgage bonanza might lead to a second real estate bubble. With market analysts pointing to a dynamic evolution of the local residential scene, The Diplomat - Bucharest takes a closer look at this year's prospects.

2018-10-08 09:50:10 - From the Print Edition

In the past few years, the increase in new housing demands has been encouraged and preserved by factors such as an increase in purchasing power and income, a low mortgage loan interest rate, all in combination with the Romanian home owner mentality. Under these powerful circumstances, "it is too early to see an impact of the economic environment's recent changes in housing demand," according to Daniela Barbu, marketing communications specialist at Conadi.

Housing loans accessibility has put the residential market on an upward path in the past few years. Romanians under 35 have had an option in place though which they could buy a dwelling under preferential conditions guaranteed by the state. Dubbed "Prima Casa", the programme is targeted at the low and medium-low residential segment and covers just a part of the residential market. The medium and medium-high segments have nevertheless also been blooming over the past two years, because of economic growth and changes in buyers' behaviour, without a connection to "Prima Casa".
Another category of customers on this residential segment is represented by buyers who access standard mortgage loans, and data from BNR show that their number is increasing. Banks granted 1.35 billion RON in mortgage loans in the first two months of this year, a volume 27 per cent higher than in the same period last year.

"In this context, with optimal financing conditions other than ‘Prima Casa', the residential market has very good chances to find its balance and to become more mature," says Barbu. Although there is a slight increase in mortgage interest rates, the expert feels house prices will remain unchanged on all market segments. "On the medium-high and high-end residential market, one of the reasons why it is unlikely to see a change is the fact that most of the buyers are either using their own financial resources in the acquisition, or small standard mortgage loans."

Risk warning

Romania has not exceeded the six per cent risk mark in the real estate market, but it is not very far from it, according to Liviu Voinea, deputy governor of the Central Bank.
"Last year, the European Systemic Risk Board - which is somehow the father of all the national macro-prudential supervision committees - issued risk-warnings in the real estate market to eight countries and Romania has been close to six per cent over the past two years," says Voinea.
He claims the real estate medium growth is always linked to residential mortgages: "We have not crossed the six per cent threshold, but we are not very far from it."
Nothing to worry about, says the Romanian Financial Analysts Association (AAFBR).

"The real estate bubble from 2005-2008 in Romania and the extent of the subsequent correction left heavy scars in people′s memories, so even [the smaller] house price increases over the past two years have raised fears that we are in danger," according to its analysts.

The association believes there are arguments to suggest that the market is in a much better position than a decade ago. Moreover, the very high supply could stop a significant price acceleration even before it starts. In its opinion, the traded prices reported by Eurostat are already announcing a "cooling off" of the market, with an increase of only 5.6 per cent in the annual rate over the last three months of 2017.
"However, there are enough elements of fragility which, in case of problems that would manifest themselves on other plans, would transpose into a difficult period for the real estate market as well," says AAFBR. "Recent statements of the central bank referred to concerns about a too-high level of financial liability".

The key argument of AAFBR can be summarized as follows: today′s average wage buys over 70 per cent more goods and services than the one from 2007-2008, while house prices are more than 40 per cent below pre-crisis highs (despite increases in recent years).

Rising house prices

Because of the interest rate increase, market analysts feel house prices are to remain unchanged on all market segments. On the medium-high and high-end residential market, one of the reasons why it is unlikely to see a change is the fact that most of the buyers are either using their own financial resources in the acquisition, or small standard mortgage loans.

One of the most valuable clues to answering the question of sustainability when it comes to rising house prices is provided by the European Central Bank. The ECB periodically publishes several indicators in the European Systemic Risk Board, including over/under-valuation of residential real estate assets. On the ECB model, Romania appears to be the most underestimated EU market now, after being considered one of the most overrated in 2007.

The current price evolution is a healthy one, reflecting recent revenue growth, strengthened by the resumption of economic growth, says Bogdan Iliescu, associate director at Crosspoint Real Estate.
"It was a natural thing for interest rates to rise, a benchmark interest rate below one per cent is characteristic of a monetary crisis policy. As soon as we see inflation plummeting, interest rates will stabilize and begin to decrease," he adds.

Developers feel it is important to keep in mind that housing supply on the market is currently far below demand.

The sales manager for Hagag Development Europe, Cristina Ghita, feels that the residential market is stable with no undue increase, and prices have evolved according to demand. "We do not expect any price drops in the next period," she says. "From our point of view, long-term demand will continue to exist, and buyers will access financing products that will allow them to purchase a home, even at a higher interest rate."

New real estate crisis?

It doesn't seem so, if you ask some real estate players. A real estate crisis is the consequence of an economic crisis which, in the context of globalization, doesn't originate in Romania, but at a global level.
As for the Romanian residential market, it has started to recover, today being closer to normality, according to local developers. The medium-high segment started its recovery in 2016 and the high-end started to recover last year, which market experts feel it means that the Romanian residential market is still far from achieving its maturity.

"Several market key indicators show that the residential market is more stable now," says Barbu. "The increase in income due to economic growth should cover the increase of mortgage loan interest rates. Moreover, in the past ten years, people have developed a saving philosophy, deposits by the population have steadily increased, and 2017 marked their highest value in the last ten years - with more than 106 billion RON (22.74 billion Euro). This means that despite loans being more expensive and subsidies being reduced, the population had acquired significant savings to compensate for this. This reflects mostly in the number of off-plan house acquisitions and the number of integral in-advance payments on the medium and medium-high residential segments."

Another important indicator is the regaining of confidence in the real estate market. If several years ago, people preferred deposits for saving money, in the past three years the residential market has become a more profitable investment than the deposits, due to yields higher than bank interest rates.
Plus, house buyers are financially educated and carefully choose their financial solution for house acquisition.

"For example, in the first two months of this year, due to the interest rate increase, more than 60 per cent of customers chose mortgages with a fixed interest," says Barbu. "This stands as a proof for the fact that as a people, we've learned from the experience of a crisis and we are more cautious."
Crises usually occur when nobody talks about them, as Bogdan Iliescu from Crosspoint explains: "In 2008, everyone thought the party would continue indefinitely, given that many key indicators could prove that. Now everyone is talking about the crisis, showing a much higher degree of risk attention, which is just what it takes to avoid a crisis. We can also see in history that in the sequence of economic or financial crises, they did not happen one after the other on the same asset class. If history teaches us something, it is most likely that we will see a correction on stocks, maybe one after Government bonds and then see a correction on real estate. We do not see the ingredients of a major crisis in the short and medium term."

Two more years for "Prima Casa"

What makes Romania different from other countries is mainly the mentality of the Romanians and their desire to own, to be owners. This way of thinking has over time transformed into a lifestyle and propelled real estate into one of the first-line sectors of activity.
"We are talking about a buyer's market here, a market where all properties, whether apartments or homes, are in high demand. Also, the interest in apartments in new residential complexes is increasing compared to previous years," Ghita says.

She feels that big cities, especially Bucharest, have all it takes to offer residents a high standard of living, and this translates into the desire of many people to relocate and to buy a home.
"A good part of those who can access the ‘Prima Casa' programme are doing it. However, we are aware that this funding instrument will only be available for the next two years, until 2020," she adds.
The ‘Prima Casa' programme has been a basic pillar of support of the residential market and, as far as possible, its prolongation beyond 2020 would be a good thing for those interested in purchasing a home, as well as for developers.

Developers estimate that after this period, the market will indeed experience a slowdown in the purchasing pace. However, they are convinced that although interest rates will increase, buyers will find ways to finance their loans.
An overwhelming majority of Romania's housing stock consists of dwellings built in the 1950s and 1970s, a stock that approached or surpassed the deadline for which it was designed to resist. Also, it does not offer the comfort of a modern life.

"From the affordability point of view, Romania is still very good," says Iliescu. "A person with an average income in Romania can buy a home at an average price in 9.5 years. In 2008, we were talking about a 30-year period when homes were 40 per cent more expensive, but revenues were 70 per cent lower. In the region, countries such as Hungary, the Czech Republic or Poland have this index between 13 and 16 years, and Western countries over 20 years."
In his opinion, the "Prima Casa" programme program did not stimulate the construction of quality housing, but rather placed the emphasis on the price.
"Many buyers who could have turned to another form of financing chose ‘Prima Casa' to reduce their monthly instalment. I believe that the government program is no longer necessary for the market," Iliescu concludes.

Analysts say there are some elements that support the fact that there is a real need for housing especially in cities, or in the vicinity of urban areas. Young Romanians leave the parental home on average at the age of 28, compared to 26 years old, the average age in the EU, according to AAFBR: "Romania has the highest rate of overcrowded families in the EU (48 per cent) compared to the average of 17 per cent."

Market vulnerabilities

There are some elements of vulnerability for the real estate market in Romania. One of the most important is the low level of financial education, which leads to situations where buyers get a larger bank loan than they would be able to repay if the economy were to enter a correction period, as has happened before.

Analysts claim the temptation of "larger loans" remains a reality of an emerging economy that has not yet forgotten the shortcomings of communism and which has not yet gone through enough "boom-bust" cycles to learn painful lessons on its own.

Another element that increases market fragility is the general macroeconomic context, which is no longer at the same good level as two years ago and puts Romania in a weak position compared to other EU countries, including those in the region.

At the same time, inconsistent public policies can generate problems in the future, but it would be a pure speculation to argue how this could affect the residential market, analysts say.
"No less important is the fact that the real estate market is profoundly pro-cyclical, and developers are making decisions rather reactively," AAFBR experts explain: "In the case of Romania, the good news came in the past few years, but the fact that we are in a late phase of the economic cycle is not at all encouraging."

Analysts conclude Romania has nothing to worry about because housing prices are 40 per cent below the peak reached before the crisis, while the revenues have increased in real terms by more than 70 per cent.