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Residential Real Estate in CEE

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Supply Shortage: Clear Driver for Sustainability

Thu, May 22 2008, 15:20 GMT
by Yapi Kredi Bank Economic Research Department

UniCredit Group

Summary

Over the last decade, many countries in the CEE region have been experiencing a significant increase in house prices, raising concern about possible risk of overvaluation. Understanding the fundamentals behind the CEE regional real estate market has therefore become a priority.

The privatisation process had one clear effect on house prices throughout the region. Dwellings were sold to tenants at low, non-market clearing prices, leading to strong misalignments with fundamentals.

As a consequence of privatisation, home ownership is generally high in the region, but the quality of housing stock still lags behind the Western European standard. Moreover, the supply of new housing has always been unable to fill the demand gap, despite acceleration observed in recent years especially in the capital cities and urban areas. On the demand side, increasing stabilisation of the economic environment, favourable demographics trends, fast convergence in incomes and wealth in combination with better accessibility to credit have been supporting strong demand for improvements in living standards. The widening demand was, however, accompanied by a sharp deterioration in the affordability of housing, especially for lower income groups. As a result, in many countries demand for house purchase remained mainly linked to the emerging middle class segment or to high net worth individuals. An important demand driver in CEE has also been the emergence of demand from abroad, especially for real estate in the capital cities and in the holiday home segment. Additional drivers include domestic real estate demand for investment purposes, with a growing category of buyers also represented by migrant workers channeling a substantial part of their savings into the domestic market. Overall, we still believe that house prices in the region are compatible with an equilibrium level, based on households’ income and interest rates prevailing in the market. Still, there might be some out-of-equilibrium trends in some sub-segments.

Looking ahead, the residential property market continues to present opportunities. Despite the current global scenario, we continue to maintain a positive view – on the back of still large unsatisfied demand and ‘potential demand’ currently limited by affordability issues – with some moderation of past trends, but without a backlash. There are clearly a few areas to monitor which might exhibit some oversupply – i.e. the holiday home sector in Bulgaria – which might suffer from low quality/low infrastructure, reduced foreign demand given the current international scenario and insufficient domestic demand. Slowing demand from abroad in addition to still low affordability for resident households might also contribute to some imbalances in capital cities such as Bucharest. In this context, the major warning example remains Kazakhstan where the real estate bubble is bursting.

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Published on  Thu, May 22 2008, 15:27 GMT