The housing market in Bulgaria was hot and euphoric in 2021, maintaining an upward trend that was the longest in the last thirty years. What can we expect this year? Capital Weekly asked five experts in the fields of macroeconomics, real estate, and construction.
"Housing will become less accessible"Christopher Pavlov, Chief Economist at UniCredit Bulbank In 2020, a middle-income household needed to save its gross income for 4.3 years to buy an average home of 73 sq.m. This makes the housing in our country "seriously inaccessible" according to the four-point rating scale used by the economists at UniCredit Bulbank. At the same time, in 2020 housing in Bulgaria was more accessible compared to the price boom in 2004-2008 and compared to the house prices reported in developed and developing countries.
In the short and medium-term, the affordability of housing will slowly deteriorate, as the increase in house prices is likely to outpace the increase in incomes.
Two factors will play an important role in accelerating price growth over the next few years.
First, there is a double-digit increase in the prices of some construction materials such as iron, cement, and wood. Having in mind the increasing demand, developers will probably pass all the cost increases they face onto end-users.
Second, the decline in the yield on bank deposits will force savings owners to direct more and more money to the housing market. This is especially valid for the bigger cities, where the acquisition of a second or even third home is becoming a preferred form of saving.
"The market is overexposed, ending the euphoria will be healthy"
Strahil Ivanov, Executive Director of Yavlena real estate agency
The phrase "Nothing sells better than fear" describes quite well what happened in the real estate market in 2021. It was a year that surprised even those working in construction, project design, and real estate sectors.
What will happen in 2022? I hope that the current euphoria of buying a property at any cost will end soon. I think this will be healthier for the personal finances and savings of many people who have been saving money for bad days and/or investments for years.
We continue to depend on the Covid factor, which is still shaking the economies. It affected the supply chains and increased the prices of materials. The housing market also depends on the behavior of banks. In recent weeks, we saw a slight outflow of mortgage buyers. If this trend continues, the market will cool down and the pace of price growth will slow down.
"The question is whether inflation will turn over the housing market in 2022"Lachezar Bogdanov, Chief Economist of the Institute of Market Economics
The sharp rise in consumer prices is likely to have a strong effect on banks. It seems the extremely soft monetary policy may end, which means more difficult access to credits. If interest rates rise and mortgage lending conditions are tightened, the reverse process can begin - with the monthly amount set by households for this purpose, it will be possible to finance a lower purchase value, especially for 25-30-year loans.
In the case of stagnation, some of those who own homes without using them may offer them for sale, considering that the period of rapid price increases is going to end. This would trigger the reverse cycle of expectations and incentives.
Finally, a change in the general price levels is very possible. Also, inflation expectations may surpass the possible tightening measures of the European Central Bank. Thus, potential buyers will become even more motivated to invest in residential real estate at zero nominal interest rates on deposits and strongly negative real interest rates (after accounted for inflation) on both deposits and loans, at least in early 2022.
"Housing prices will go up"Georgi Pavlov, Executive Director of Realto Group real estate advisors
The trend of rising house prices will continue and banks are the reason. Currently, not all banks guarantee even a zero interest rate on deposits. So, house prices will go up and this suggests problems in the economy and a lack of alternatives to invest.
Real estate is usually available only to those who have money to invest. But it is becoming available to more and more people thanks to credits and in this sense, the affordability of housing in our country is growing. I have been monitoring for years what part of the average salary goes to the payment of a mortgage installment. Amidst the worst crisis, the percentage was 100 - the mortgage installment was as high as an average salary, now it is 70% of it. The data are for an apartment of 100 sq.m. and a 20-year loan with a 20% deductible. Prices have risen since 2014, but interest rates have fallen. Hence, the pressure on households to pay their installments has decreased. Interest rates will not fall forever, but the average wage will continue to rise.
The supply may be increased with a possible increase in interest rates. It would motivate more people to start keeping their money in banks. Even some of the investors in real estate may decide to collect the profit and keep it in a bank.
I've already said before that property prices in Bulgaria depend on the European Central Bank in Frankfurt. Wages are rising because of the demographic situation. The construction of new buildings continues and here this is easy. If there is no abrupt change in Frankfurt, I do not see what can change in our country.
"The cost of labor will be a bigger problem than the price of materials"Nikolay Chomakovski, Executive Director of PSS Construction
In 2021, the prices of construction materials jumped dramatically - by more than 50% compared to 2020. I expect that this year the cost of labor will be a big problem, bigger than the cost of materials.
So far, property prices have not increased by more than 20-30%, although the increase in the price of construction materials is much higher - for certain products it has reached even 100%. Investors will try to achieve better prices on the market and we will see where the breaking point is. For me, it is about 1,500 euro per square meter for the mass final product (which is not premium) and if it has to be increased, there will be an outflow of buyers. The higher price requires clients that can afford it and those who can have already bought a home. Some people will invest in a dozen apartments, but they will also look for prices around 1300-1400 euros per square meter.
In other words - I do not see many possibilities to increase final prices. And if the cost of construction continues to rise, the margin of entrepreneurs will melt to the point that investment interest will decrease. But the started investments will be completed, I do not expect mass suspension or freezing of projects.