Why housing prices aren’t going down in Bucharest?

August 25, 2023by Maria Neda

COSTIN NISTOR, Managing Director, Fortim Trusted Advisors, alliance member of BNP Paribas Real Estate

In the last 5-6 years, we have seen various analyses made by financial specialists who do not understand very well what the real estate market in Romania means and who announce that a price adjustment is imminent in the whole real estate market by at least 20-30%. As an argument, they use macro data that they either do not understand or they do understand but they use them out of context to reach this conclusion. By the 20-30% drop expected as early as 2018, the Romanian housing market has matured, and even though it has seen some record increases in the pandemic years, we are now seeing a reset to pre-pandemic levels. Just to understand, since the first articles announcing the drastic drop in prices in 2018 and until now we have seen an average increase in apartment prices of over 41% across the country and over 25% in Bucharest, according to the imobiliare.ro index.

In the lines below, based on public data from ANCPI, BNR and Fortim Trusted Advisors analysis, I will explain why specialists with traction on LinkedIn or TV are wrong when they analyze only from a credit perspective the potential price decline in the residential market.

First of all, the specialists refer exclusively to the residential market as representing the entire real estate market in Romania, without ever mentioning the commercial real estate market (office buildings, industrial or logistics halls, retail parks or shopping malls) which is significant in terms of financed value. When it is mentioned in the public space that the banking system has a 30% exposure to the real estate sector, the commercial segment is not included even though it is significant.

The year 2022 represented for the commercial segment of the real estate market the highest value of transactions in the history of the market with transactions amounting to more than one billion euros, much of it financed at already high interest rates which are cited as a warning signal for the dramatic fall in prices. At the moment, there are no owners in the commercial area of the real estate market who want an exit with a downward price adjustment and we have no signs that this trend is about to change, so there is no talk of a 20-30% drop in prices in the commercial area, in fact this did not happen in 2008-2009 for healthy projects either. However, an adjustment in yields (but this is to some extent covered by rising rents due to inflation) or price decreases for projects suffering from high vacancy are not excluded.

71% of transactions in the first 7 months of 2023 were made exclusively with cash!

Regarding the residential market, it must be analysed on a city by city basis, each one having its own specificity, for example in Bucharest, Cluj or Brasov, the authorisation of new projects is very difficult, due to administrative bottlenecks, which will lead year after year to a decrease in the number of new units delivered. Although it seems hard to believe, from 1990 to 2022 the stock of apartments in Bucharest has increased by only 17%, or 0.5% per year, which for a city the size of Bucharest with so many problems with old buildings is extremely little.

In a recent analysis of Fortim Trusted Advisors carried out together with imobiliare.ro, there is an annual demand of 60,000 new housing units in Bucharest, but the number of units delivered is a maximum of 12,000 / year – 13,000 / year, with a downward trend in 2023 and 2024 towards 11,000 / year, i.e. a decrease in units delivered but also in future transactions of 8 – 9% / year.

Also, according to data published by ANCPI in Bucharest, the total number of transactions in the first 7 months of 2023 is down compared to 2021 and 2022, but beware, these were 2 peak years, with a record in 2022, in which buyers changed their behaviour following the pandemic. Very importantly, transaction volume in the first 7 months of 2023 is above the level of the similar period in pre-pandemic years.

One aspect that nobody mentions (although it is public and exists in many analyses) and which is more important than the total number of transactions in the current context is the ratio of mortgage loans to total transactions.

From Fortim’s analysis based on public data from ANCPI and BNR as well as data from imobiliare.ro, the average percentage of transactions from own sources in Bucharest in the last 3 years is 59% and in the first six months of 2023 it is 71%! That means that in Bucharest in 2023, almost 3 out of 4 transactions are carried out without the need to access a real estate loan from the banking system, so even if the number of loans granted to the population decreases by 50% the number of transactions decreases only by about 12.5%, on a downward trend in units delivered of 8-9%/year.

Only 67,191 euro is the average value of a mortgage loan in Bucharest!

According to data obtained from the NBR, in 2022 the average value of a mortgage loan was 67,690 euro and in 2023, in the first 6 months, it was 67,191 euro, and according to the Deloitte Property Index 2023 study, the average value in Bucharest is currently 1,693 euro/sqm. For a 3-bedroom apartment of 80 sqm in an average area, the value is 135,440 euro, which means that on average only half of the value is covered by a mortgage loan and the rest comes from own sources.

All these data lead us to the conclusion that such a price adjustment is very unlikely in the residential market of large cities, where the purchasing power has increased extremely much in the last period (according to Gfk, +52% in Bucharest from 2020 to 2022), where the number of new units delivered decreases from year to year, where more than 70% of transactions are made from own sources and loans are mainly used for the purchase of small units in the secondary market.

The Research Department of Fortim Trusted Advisors, alliance member of BNP Paribas Real Estate, carries out analysis on the real estate market, both commercial and residential, for its clients.

Maria Neda