Why have residential real estate prices increased?

Article byTanya Kosseva-Boshovaia Echo , The Sofia Echo, 24-30 Dec 2004

The increase in residential real estate prices in the recent months has brought unprecedented media coverage of the real estate market.One can read articles about real estate in almost all daily and weekly newspapers and magazines.Real estate has become an attractive topic even to government officials, whose public statements have even further increased the hustle around residential real estate prices.

The Bulgarian real estate market is yet another free, unregulated market, where the mechanisms of supply and demand command the movement of prices up- or down-wards.At the same time, the real estate market has some specific characteristics, which make it a unique market: lack of sufficient information; a reaction lag as compared to the other sectors of the economy; non-standardised product; lack of mobility of properties, as well as, buyers and sellers; limited number of transactions in one’s lifetime.Therefore the smooth mechanisms of the free market economy would be influenced by all of these factors and should be taken into consideration when analysing the property market.

Any student in economics would tell you that prices rise when either supply shrinks or demand increases.What has happened on the Bulgarian real estate market this year?Both supply and demand have grown significantly with demand outpacing supply and therefore leading to higher sales prices.

What is more interesting is what has caused demand to grow at such pace and incur such media coverage? The size of the population, disposable income of the population, availability of mortgage credits and government actions can influence demand for residential properties.

The overall population of Bulgaria has been decreasing slowly in recent years, but at the same time the poor economic conditions in the countryside have forced many Bulgarians to move to the bigger cities and especially to the capital.This has led to an increase in the number of potential buyers of real estate in Sofia and the bigger cities. As a result the real estate market has been most active in these markets and is expected to continue to be in the short and medium term.

The mere number of people is not a sufficient driver for the increased demand for properties – the disposable income of households is extremely important.The steady economic growth of the Bulgarian economy over the past few years has allowed some portions of Bulgarian society to be able to earn and save more money. In addition, the positive prospects of the economy have encouraged Bulgarians to plan their long-term investments in homes. People are now starting to have positive expectations and perceive the economy as moving steadily in the right direction.Should the economy continue to grow in the future the demand for residential real estate will continue to increase.

Disposable income of Bulgarians is further enhanced by the availability of mortgage loans.Although interest rates are still high 8.5 to 12.5 per cent a year, many Bulgarians have taken this opportunity to be able to enjoy a new home now rather than wait for enough funds to be accumulated in 10 to 15 years.The increased competition between commercial banks will further drive interest rates down and therefore stimulate the demand for residential properties.

Numerous politicians and governmental officials, as well as, other individuals, believe that Bulgaria’s accession to the EU and NATO will drive real estate prices up overnight.However this will not happen overnight but rather over a longer period. The expected accession to the EU and NATO have both affected positively the development of the Bulgarian real estate market, creating positive expectations and sense of security both in Bulgarians and foreign investors.Again, these positive expectations have created additional demand for real estate properties.In this way the government has affected the real estate market in the medium term.

The Bulgarian real estate market underwent significant changes in the beginning of the year.Up to the first quarter of 2003, the residential real estate market in the larger cities was denominated in US dollars.The depreciation of the dollar against the euro encouraged the majority of sellers to convert the dollar denominated prices into euro.The phenomenon here is that they did that at an exchange rate that was significantly different from the market one thus driving sales prices up at least 10 per cent.Although prices have been driven up, this translation is actually positive for the market in the long term.The Bulgarian lev is pegged to the euro, the majority of the salaries are denominated in leva or in euro, and therefore it is logical to have real estate prices also denominated in these two respective currencies.The commercial real estate market, being a step ahead, has already experienced that a year ahead, although for a different reason.

All these positive economic and political signals in the Bulgarian economy have encouraged both Bulgarians and foreign nationals to purchase residential properties with an investment purpose.This is done because of the excellent potential that the rental market still provides to expatriates.These quality properties are usually leased to foreign managers of multinational companies or diplomats at relatively high rental levels.Then, in few years significant capital gains are expected from the sale of the property.This is highly plausible and expected to happen, should the Bulgarian economy continue to grow at this rate.

The government has recently taken a small but significant step in stimulating the properties market – the process of acquiring all necessary permissions for a new construction has been eased and shortened significantly. The market still awaits the long expected change to the constitution, allowingforeign nationals to acquire land in Bulgaria.Last but not least, the government can stimulate the mortgage loan market by providing some tax relief for users of mortgage loans thus stimulating demand for residential real estate.

The Bulgarian real estate market follows the traditional market mechanism of development but due to its specific nature, changes in prices occur slowly, and there is a significant lag of few months before the market absorbs any economic news. The expectation is that the prices will continue to gradually grow in the near future thus stimulating developers to continue to deliver new products.

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