Rents going up more slowly than housing prices

Recently, real estate investors have not even been aiming for returns from rents, but mostly looking for a safe shelter for their money.

Rents going up more slowly than housing prices

Home rents increase, following the rise in mortgage payments, incomes and inflation.

Recently, real estate investors have not even been aiming for returns from rents, but mostly looking for a safe shelter for their money.

© Цветелина Белутова


Main takeaways
  • Home rents increase, following the rise in mortgage payments, incomes and inflation.
  • Property prices are increasing faster because housing is also an investment asset.
  • A reversal of the trend is possible, which makes the current situation not proper for buy-to-let.

The connection is clear - if housing prices rise, rents should also increase. However, the rise in rental prices has slowed down in recent years, and experts say that they are lagging. Comparisons are not easy to make, because there are no official statistics and accurate data, and housing rentals are mostly grey. But they are not impossible.

Sales prices in Sofia increased by 20% in April compared to the same month of 2021, while rental prices rose by 3%. In both cases, we are talking about offer prices and the data comes from the property website ocenime.bg. According to information from Yavlena real estate agency, the year-on-year increase in the sale prices of housing was between 14% and 17% in June, while it was 10-13% for rents.

The trend of slow rent increase is confirmed by most experts in the sector and is relatively good for tenants. For current and future landlords, however, it means diminishing returns. "The net rental yield has fallen and is currently between 3% and 4% in most districts of Sofia. This means that a home can be fully paid for with rental income in 25 to 33 years. There are even properties where the yield is around 2%, i.e. the investment will be paid back in 50 years," says personal finance consultant Stoyne Vasilev, who is also the founder of the SmartMoney.bg website.

Historically, a level slightly above inflation is considered healthy for rental yields. If inflation stays at 2-3% for long, the net rental yield should be around 4-5% and the property investment should pay back in 20 to 25 years, he explains.

The reasons

The rise in rental prices is linked to income growth and inflation. However, the more the properties become an investment asset, the more their price is detached from thefundamental factors, explains Lachezar Bogdanov, chief economist in the Institute for Market Economics.

"No one knows where the tipping point is - someone will say it's time to sell, and others will follow," he explained during a recent conference organized by the National Real Estate Association.

Recently, real estate investors have not even been aiming for returns from rents, but mostly looking for a safe shelter for their money, betting on the so-called capital gain from a potential rise in the price of their property in the future.

Another factor that seems to depress rental prices is the currently cheap mortgage lending. "The rental price is similar to the price of a monthly mortgage payment," explains Yordanka Rangelova, manager of the Rents and Business Properties office in Address agency. The logic is that if rents significantly exceed mortgage payments, it becomes more profitable for renters to buy a home on credit.

According to ocenime. bg, the average rent in Sofia in May is 704 levs (360 euro), and the rent-to-mortgage ratio is 0.94, i.e. the loan instalment is still a bit larger.

Demand and supply

Others think that the slower rate of rental price growth is due to increased supply of rental housing alongside many investment purchases made in recent years. For now, brokers do not confirm that theory and say the rental offer is normal. However, properties for sale tend to be in short supply as both investors in new construction and the owners of old homes refrain from selling because of inflation.

Still others explain the phenomenon with reduced demand for rental housing. "The main reason for this in the last two years has been the pandemic and its consequences. In addition, many people who were living on rent succeeded to buy a home with a mortgage loan," says Stoyne Vasilev.

Steliyana Vasileva, a broker at Yavlena agency, adds that the rental market is directly affected by all kinds of external and internal factors, and demand and supply are always out of balance. "When rental demand is higher, supply can't always cover it. And when ready-made investment properties come on the market, demand has already fallen or has moved to another segment," she says.

Rents catching up

At the moment, the demand for rental housing in Sofia is recovering, and rental prices are steadily rising. According to Address agency's data, they are up between 5 and 10% for the various neighbourhoods compared to last year. The main driver for the recovery is young people returning to work from the office. This trend is expected to intensify this autumn when students will also enter the classrooms. In addition, Ukraininan refugees also contributed to the rise in demand for rented property. "In general, we are observing a smooth return to the levels of demand from 2019," summarizes Steliyana Vasileva.

Rental prices continue to rise at a slow pace, and in most neighbourhoods, they have returned to pre-pandemic levels, says Stoyne Vassilev. He attributes the rise mostly to higher inflation and rent indexation clauses which many landlords already include. According to Yordanka Rangelova, the market is stable, but the landlords who try to raise the rental prices according to the current inflation, find themselves well above the clients' budgets, and it is difficult to reach a deal. A more effective approach is to index prices to the previous calendar year's inflation, which is not as high, she believes.

At the moment, the demand for rental housing in Sofia is recovering, and rental prices are steadily rising.
Photographer: Надежда Чипева

As demand recovers and inflation speeds up, rental prices are also expected to rise. The chairman of the National Real Estate Association and manager of Foros Dobromir Ganev thinks that an increase of 10-15% for certain areas and properties will take place this autumn.

And when interest rates go up

However, the rental market is also influenced by factors that are more difficult to predict. "Much depends on when and by how much interest rates will rise, whether there will be more serious restrictions on housing lending and when and by how much property prices will fall," says Stoyne Vassilev. According to him, the expected gradual increase in mortgage interest rates within a year will give a new impetus to the rental market. He expects a smooth rise in rents in the attractive districts of Sofia in the coming years and retention of rental prices in the so-called "new" and "trendy" neighbourhoods where there is competition between many rental investment properties.

Tihomir Toshev, an advisor and executive director of Credit Center consulting group, also explains that if the housing market slows down, as is expected next year, the rental market will probably become more active.

...or if sales prices go down

Here the hypotheses are different. "When sales prices go down at a slow pace, renters will also follow them smoothly, the way they followed them smoothly when they were up," says Yordanka Rangelova.

According to Stoyne Vassilev, if a correction in property prices is made, it will be more profitable for many owners to sell rather than rent long-term. This will further push house prices down and surprise investors who are currently focused only on capital gain, he adds.

Mortgage or rent

He recommends people with a small deductible carefully consider whether this is the right time to take out a loan, because the situation is very unstable, not only in Bulgaria but also in the whole of Europe.

"In the current situation - war, high inflation, risk of recession, the expected increase in interest rates on loans, new Covid wave in Europe, I would not recommend financing an investment purchase of a home with a loan for the purpose of renting it out. There are too many question marks, and such a deal can lead to very risky situations for the family budget," says Tihomir Toshev. It is good to make such deals with saved funds. Even in these cases, however, the type of property, its location and its prospect for renting should be carefully considered. A lot of buy-to-let homes have been bought in recent years, and that will make this market increasingly saturated and difficult, he adds.

Stoyne Vasilev also does not recommend such housing investments to be paid for with rental income in the current situation. The main reasons are the low yield and the tendency towards a rise in interest rates on loans, which will make those investments even more unprofitable.

Main takeaways
  • Home rents increase, following the rise in mortgage payments, incomes and inflation.
  • Property prices are increasing faster because housing is also an investment asset.
  • A reversal of the trend is possible, which makes the current situation not proper for buy-to-let.

The connection is clear - if housing prices rise, rents should also increase. However, the rise in rental prices has slowed down in recent years, and experts say that they are lagging. Comparisons are not easy to make, because there are no official statistics and accurate data, and housing rentals are mostly grey. But they are not impossible.

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