When the market is in euphoria, pragmatism is lacking - why does this happen?

First a little theory and pragmatism. What does influence the real estate market? Naturally - supply and demand. But what does really determine supply and demand?

09:00 | 22 октомври 2021
Снимка: Bloomberg L.P.
Снимка: Bloomberg L.P.

by Isabella Klisarska

First a little theory and pragmatism. What does influence the real estate market? Naturally - supply and demand. But what does really determine supply and demand?

Each economist and person who is interested in reading or in the subject understands that in order to buy, you should have money - personal/corporate or borrowed. In order to sell, you should have the need to get rid of a property or often - the need for free financial resources. But in either case, you have to have a goal.

When the market is in euphoria, pragmatism is lacking - why does this happen?

In recent years in our country the population is declining and the construction of new buildings is increasing. According to official data from national statistics, the population of Bulgaria has decreased by about 6% for the last 10 years. We will look forward to the data from the ongoing national census, but practically we do not expect a significant difference in the overall picture.

Additionally, according to NSI data, for the last 10 years, in the city of Sofia alone, about 1,200,000 square meters of living space or about 10,000 new housing units were built, and over 9,000,000 square meter and almost 100,000 new homes in the country as a whole. If we look at the data of the statistics for issued and entered into force building permits, they are even more indicative: only in Sofia for the last 5 years building permits were issued for over 6,500,000 sq. m. of residential areas, the implementation of a number of large-scale housing projects is underway, which are expected to be completed and put into operation in the next few years. This is happening not only in Sofia, but also in some of the other big cities in the country.

All this suggests a kind of paradox - people continue to search and buy real estates, considering the fact that number of our housing facilities is not small.

Here is one of the explanations. People who already have good income in cities are looking for a better standard of living, for newer, bigger and cleaner homes. In Sofia, for example, according to official data, the average monthly salary already exceeds € 1,000, and for some professions it is even up to several times higher. These people are not content to live in old buildings with neighbors without good incomes and opportunities and with poorly maintained residential entrances. They have travelled a lot, seen more and are looking for even better habitation than what they have encountered. They increase their demands in terms of the environment they live in, not just for the inside the apartment or house.

From what was commented so far, we can identify a group of people with substantial income who are looking for a higher standard of living, which in the most general case is associated with a home of a higher quality - a house or an apartment.

Higher-income customers also buy properties near the city where they live for weekend use, for the holidays or during a lockdown. The "lockdown" factor has made a very significant contribution to the market of suburban, rural, Black Sea and other resort properties. For the period after the beginning of the pandemic in Bulgaria - for a year and a half, the inquiries for houses and plots have increased averagely more than 5 times compared to the previous 2019. The lockdown led to another interesting fact - looking for a property with an extra room to work from home so we can have "a home office" from a place where we are or in the home where we live or temporarily live - rural, suburban, Black Sea or resort property.

This fact was an additional motivation for some people to buy newer and bigger properties and to sell the place they were currently living in. Meanwhile, these people started to search for a bigger and high quality property which is convenient and comfortable for them to use.

The development of new construction of the type of closed complexes of apartments and houses or mixed of the two types of properties has led to another demand for people with free funds or high incomes. Their interest is directed to an environment of neighbors with a similar standard of living and opportunities and a well-maintained and organized "surrounding" space - these are new buildings in or around cities with many services, security and well-organized service and maintenance by professional companies. People tend to pay for good service, but at normal market prices, and not to deal with the maintenance and servicing of the property or properties they own. Entrepreneurs who meet this demand and organize quality long-term service have good prospects for future business and recommendations.

What are the factors that led to this boom in 2021 on the real estate market? Let’s see a few figures.

According to official data of the Registry Agency for the first half of this year we have registered growth in real estate transactions of almost 40% for the whole country, compared to the same period in 2020 and about 14% compared to the first half of 2019, which was extremely strong for the real estate market (this comparison excludes the impact of the corona crisis in the second quarter of last year). For the deals in Sofia the increase compared to 2019 was by over 23%, and for Plovdiv - by over 27%.

It is also interesting to consider the official data for the nine months, which we expect by mid-October, and whether they will confirm our observations for an even faster pace of the market than in the previous quarter. What makes a strong impression is the increased number of transactions with registered mortgages and their share in the total number of transactions. For the first half of the year only in Sofia almost 50% of the registered transactions have mortgages, in Varna - about 35%, in Burgas and Plovdiv - about 30%. In the district cities, almost every third transaction is made using a loan. The growth in lending is also one of the factors that helped the real estate market emerge from the corona crisis last year and caused a "boom" this year.

A lot of commentaries can be made about the factors that led to this "boom", but here are some of them in brief:

- The first factor which everyone encounters on a daily basis is the fear of inflation and that the money one owns will diminish;

- The second factor, not less important than the first is lack of incentive to keep money in banks, caused by the fees already imposed by a number of banks for keeping of funds (cash fee) above a certain threshold, i. e. in banks, money tend to decrease;

- The third factor – the euphoria spiral which we are witnessing at the moment. A purely psychological factor includes the fact that when a buyer makes several inspections of properties and decides to buy after a few weeks, one realizes that most of the selected properties have already been sold. From now on, this is already a factor in the additional "energizing" of this hot market;

- Fourth factor - banks sell their loans at extremely competitive interest rates and conditions, through advertising and increased activity;

Fifth factor – the comparison each prospective buyer makes with property prices in other European cities and capitals and the impact of the fact that prices in our country are still low. The euphoria takes place not only in Bulgaria, but in most other countries as well.

What are we going to expect on the real estate market in the coming months and year?

No one can predict when the rise in prices and the overestimation of the real estate asset will stop - not only in Sofia, not only in our country, but also in the world. The "pouring" of huge sums of money amounting to trillions of dollars in the world, without the corresponding GDP growth, means for every economist an increase in inflation and a search for an "anchor" for the stability of the funds saved by the population.

If the "printing" of money stops, the effect of the funds already utilized by the population will subside.

If central banks and leading economists with established positions in the countries decide to take a reverse trend of interest rates, in the direction of increasing them in terms of deposits, this will lead to:

- Creating a motivation for keeping money in banks;

- Ease of the construction and purchase of properties with high levels of credit.

For our market, this would calm it down to a "healthier" level. This means market sustainability, predictability in the coming years, increasing professionalism in the industry as a whole and increasing customer confidence in real estates as assets.

BOTTOM LINE The paradox of the real estate market: Bulgarians continue to search and buy real estates, considering the fact that the number of our housing facilities is not small. Why is that?