Are there elements of a crisis on the residential market, or is it just a sector reset?

In the context of the real estate market’s natural cycle, the upward trend of the local residential properties since 2014 is fueling speculation about the imminence of a similar crisis to the one in 2008. A first argument in this respect is given by the fact that housing prices are still significantly lower than in the economic boom period.

According to Imobiliare.ro, the average price demanded by apartment sellers (new and old) across the country is almost 40 percent lower than the one recorded at the peak of the market.

Thus, an apartment can be purchased at the moment with EUR 1,242 per square meter (at the end of November 2018), compared to EUR 2,058 per square meter (in March 2008).

Bucharest is 36 percent below the boom level

With one exception, the big cities have been recovering from the decline recorded during the recession. The most recent market report reveals that the biggest price difference at 10 years is seen in the largest real estate market in the country, Bucharest – where the apartments were in Q3 2018 35.9 percent cheaper than in the same period of 2008.

Important differences can also be seen in regional centers such as Constanta (-25.9 percent), Brasov (-25.9 percent) and Iasi (-21.7 percent). Timisoara also has lower prices compared to 2008 (-5.5 percent), while Cluj-Napoca is the only large regional center in the country where apartments are more expensive now than they were ten years ago – with a 6.2 percent difference compared to Q3 2008.

Secondly, it is significant that, although residential properties continue to appreciate as a whole, the pace of price growth slowed down significantly in 2018 – at the same time, well below that recorded during the boom period.

In the third quarter of the current year, residential property in Romania appreciated by only 0.7 percent compared to the previous three months (down from 1.4 percent in the first two quarters). Against the backdrop of lower price increases in 2018, the quarterly average of residential sector variations is, after the first nine months of 2018, at 1.16 percent versus 2.2 percent in 2017 and, respectively, 2.9 percent in 2016.

By comparison, in the pre-crisis period, the quarterly price increase margin sometimes exceeded the 10 percent threshold – the highest values were recorded in the first quarter of 2008 when housing was up 16 percent, but also in Q3 2006 (+ 13 percent), Q2 2006 (+11.25) and Q2 2007 (+10.58).

A third important aspect that makes the current market context significantly different from 2008 is the evolution of wages. According to data centralized by the National Institute of Statistics (INS), the monthly net average wage increased by almost 140 percent in the last (over) ten years, from RON 1,134 in March 2008 to RON 2,720 in October 2018.

In the circumstances in which domestic residential property is often valued in euros, a possible counter-argument to wage growth would, of course, be the evolution of the exchange rate. It is worth mentioning that, while the euro grew by only 25 percent in this period (from RON 3,7276 at the end of March 2008 to RON 4,668 at the end of October 2018), revenue growth is far from being countered when it comes to real estate acquisitions.

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