Real Estate Market: Do Not Buy at Currently Demanded Prices!

Before the onset of the coronavirus crisis, the residential real estate market was in strong upward trend. Namely, at the end of 2019 and the beginning of 2020, the prices of residential properties reached record levels not seen since 2008. It took a long 12 years for this to happen. It is also important to note that in 2019, GDP also reached the level of 2008. 

The portal moj-bankar.hr conducted an analysis (which we are fully transferring) of the impact of the announced decline in GDP on interest rates for housing loans and consequently on the achieved prices in the residential real estate market. The analysis, based on pure facts, does not indicate that the existing trend could continue, i.e., it shows the likelihood of a decline or cooling of residential real estate prices.

What to expect by the end of the year?

Since the outbreak of the coronavirus crisis, leading economists, the World Bank, and ultimately the Government of the Republic of Croatia have accepted the fact that Croatia’s GDP will significantly decline. Estimates vary, but if we stick to the one planned by the Government, which is a GDP decline of 9.4 percent in 2020, it is a sufficient argument that will cause tectonic shifts in the real estate market. Furthermore, in 2021, a GDP growth of 6.1 percent is planned, which means that by the end of 2021, we will have a GDP level similar to that of 2017 or 2018.

Analyzing quarterly rates of change in GDP along with the corresponding rates of change in residential property prices from 2003 until the end of 2019, a strong correlation between these two variables is observed (R2=0.56). Namely, when GDP significantly declines, and in the past, it fell by more than 5 percent in the first three quarters of 2009, property prices also fall. Residential property prices react somewhat slower, i.e., they need about one quarter to correct, but if after a significant decline in GDP, it continues to fall, even at smaller rates, a significant correction of property prices follows.  

Although at the end of 2019, Croatia had a series of 23 consecutive quarters of GDP growth, we are all aware that this series will stop in 2020. Historical data shows that in 19 quarters of GDP decline, property prices fell in 17 quarters, while in 48 quarters of GDP growth (from 2003 to 2019), prices rose in 40 of them. These are strong indicators that prices for residential properties will decline. As we will not reach the GDP level of 2008 in the next 2-3 years (which we just achieved in 2019), it is very likely that there will be a correction in property prices. It is realistic to expect that this will likely correct by up to 10 percent. 

An additional negative impact will also be realized through an increase in unemployment. In April 2020, there were about 160 thousand unemployed, while in the same month in 2019, there were about 130 thousand unemployed. The increase in April 2020 compared to 2019 is about 30 thousand, considering that in February 2020, there were about 20 thousand fewer unemployed than in 2019, the statistics look even worse. These two directions of macroeconomic movements have already begun to impact the credit policies of commercial banks.

How will banks behave?

Commercial banks in Croatia are facing two trends. The first is moratoriums they are introducing, which have been requested by about 40 thousand citizens so far, while about 20 thousand have been approved. It is estimated that 7 percent of credit-burdened citizens have requested a moratorium.

In addition to moratoriums, banks have also begun to tighten credit conditions. Thus, for the approval of a housing loan, the creditworthiness has been calculated according to the enforcement law for some time now, and salary supplements such as field work allowances, transportation allowances, and similar are not included in creditworthiness. With the tightening of conditions in the last month, the loan-to-value ratio has been tightened. For example, while previously the amount of the loan and the estimated value of the property could be 1:1, now in some banks, the loan amount cannot exceed 70 percent of the property’s value, while some banks, on the other hand, do not want to lend to clients who are not their existing clients. 

As interest rates are also an important component of the real estate market, we see that over the past 15 years, most price increases occurred when interest rates were below 4 percent. In only 4 quarters (in 2015 and 2016 when property prices were at a minimum and GDP was starting to grow), prices rose; in the remaining 11 quarters, prices rose when interest rates were below 4 percent.

How will the coronavirus crisis affect housing prices?

Although it is difficult to predict the prices of any services and goods, taking the above facts into account, we can certainly conclude that there will be a cooling of the residential real estate market. Several key factors will influence whether we will have a short-term decline or a long-term stagnation:

1. GDP – if the decline in GDP is short-term, and in the first quarters of the following year, economic activity reactivates, it is very likely that property prices will stabilize faster.
2. Unemployment – the higher the unemployment, the lower the creditworthiness of citizens, and banks are more cautious in their behavior. If employment from 2019 is not quickly restored, it is very likely that stricter lending conditions will remain in place and that interest rates on housing loans will rise.
3. Interest rates – current interest rates on loans are around 2.8-3.0 percent. If interest rates on housing loans remain at these levels, there is a high probability that the real estate market will recover faster, i.e., that the decline will be significantly smaller.
4. APN, i.e., housing loan subsidies – from today’s perspective, APN should serve as a price stabilizer. Especially considering the fact that a new program is announced for September. If this is indeed the case, it will definitely further reduce the pressure on price declines, i.e., the measure should have a positive effect.

We believe that the pressure to decline will be relatively short (up to two years) and if full economic activity is restored again, from 2022 onwards, property prices will continue to rise and attempt to reach record levels from 2008 again. Furthermore, in relation to the dramatic decline in property prices in 2009, in addition to the GDP decline of 7.4 percent, a large number of newly built but unsold apartments contributed to this, which are now not on the market. 

It is certainly worth observing and not buying properties at currently demanded prices, but at the same time, one should keep an eye on how and to what extent commercial banks will further tighten the conditions for obtaining housing loans.

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