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Nov 06, 2015

Another East European sizzler - Romania’s housing market is heating up strongly, despite the political crisis

by Lalaine C. Delmendo


Romania house pricesRomania has a long history of corruption and of protests against corruption, and Prime Minister Victor Ponta, who himself faces trial for corruption, has just resigned after some 20,000 people took to the streets in protest against a Bucharest nightclub fire.  But is this "same old, same old"? 

Maybe not.  The fresh face in national politics is president Klaus Iohannis, elected in November 2014.  Previously mayor of Sibiu, he turned it into one of Romania´s most popular tourist destinations. His popular appeal is as outsider to the country´s corrupt and warring political elite, although he briefly became president of the National Liberal Party during June-December 2014.  Highly critical of Ponta, he is vocal about the need to curb Romania´s endemic corruption.

“In my opinion, it is much more than a mere government change," said Iohannis of Ponta´s resignation.  "I believe we are talking about a paradigm change in the Romanian politics and I believe it is good..."

Many good things happening at the same time

This potential sea-change in politics has coincided, largely by chance, with an economic upturn.

The Romanian economy is expected to grow 3.4% this year and by 3.9% in 2016, according to the IMF. Romania’s economy grew by 2.8% last year, after GDP growth of 3.4% in 2013.

“Romania is one of the CEE countries with the most notable growth rate in investment volumes and evidence of a shift in investor sentiment towards the country,” said Damian Harrington of Colliers International, Eastern Europe.

Romania’s housing market is growing strongly, with low interest rates and improving economic conditions. House prices are rising robustly. Demand is picking up. Residential construction activity is improving.

All the country´s major cities saw an increase in house prices during the year to end-Q3 2015:

  • In Bucharest, the capital, the average selling price of apartments rose by 3% to €1,086 per sq. m.
  • In Cluj-Napoca, Romania’s second most populous city, apartment price soared by 12.4% to an average of €1,124 per sq. m.
  • In Timisoara, the average selling price of apartments surged by 10.8% to €923 per sq. m.
  • In Brasov, the average selling price of apartments rose by 2.5%, to an average of €861 per sq. m.
  • In Constanta, the country’s oldest city, apartment prices rose by 7.2% to an average of €907 per sq. m.

Cluj-Napoca´s double-digit house price increases are due to strong demand from working residents, expatriates, and students. The city is becoming Romania´s manufacturing and economic hub, and is home to the country’s largest university.

The average national selling price of apartments increased by 5.7% during the year to end-Q3 2015, to €964 per square meter (sq. m.), the highest increase in almost a decade, based on figures released by real estate firm On a quarterly basis, house prices rose by 3.2% in Q3 2015.

There are no restrictions on foreign nationals acquiring dwellings in Romania.  Ownership of land is tricky, but companies incorporated in Romania as well as resident foreign nationals and non-resident EU citizens can acquire land.

Residential transactions quadrupled last year!

Demand is rising fast. The value of real estate transactions almost quadrupled in 2014 to €1.2 billion from the previous year, according to PwC Romania, while the country´s largest bank, Banca Comercială Română (BCR), tripled its real estate loans.

Volumes of new apartment transactions in Bucharest increased 25% in 2014, the highest level since the global crisis, according to Colliers International.

“The low segment attracted the highest share of demand,” said Colliers International. "However, the middle segment witnessed an increasing number of closed deals in 2014, indicating a higher interest for buyers for such products."

Land deals are also recovering. “2014 was the first post crisis year when large residential land deals were closed in Bucharest,” Colliers added.  Major residential land transactions in Bucharest in 2014 include the 13.8 hectares of lot bought by Metropolitan Residence in Bucuresti Policolor for €18 million, and the 2.6 hectares of residential lot bought by Impact in Bucuresti B Vacarescu for €9 million.

Romania´s great housing market collapse

Romania´s economy grew robustly from 2001 to 2008, with an average annual real GDP growth rate of 6.5%, according to the IMF.  From 2002 to early-2007, property prices and demand rose in anticipation of EU accession, which took place in January 2007. But investors were disappointed by non-implementation of economic and political reforms which had been promised as part of EU accession conditions. Corruption remained rife, largely ignored (or tolerated) by the government.

Then came the Euro-crisis. GDP plunged by 7.1% in 2009 and fell by another 0.8% in 2010:

  • In 2009, house prices plunged by 20.62% (-24.22% inflation-adjusted) from a year earlier.
  • In 2010, house prices fell by 15.88% (-22.08% inflation-adjusted) from a year earlier.
  • In 2011, house prices dropped again by 4.07% (-6.99% inflation-adjusted) from the previous year.
  • In 2012, house prices fell by 1.31% (-5.96% inflation-adjusted) from a year earlier.
  • In 2013, house prices fell by 8.18% (-10.43% inflation-adjusted) from a year earlier.
  • In 2014, house prices dropped 0.78% (-1.78% inflation-adjusted) from a year earlier.

Property prices fell by more than 56% from 2008 to 2013 due to the adverse impact of the global economic downturn and the ensuing Euro-crisis.

An explosive combination

Romania interest rates

Now economic recovery, in tandem with low interest rates, is changing everything. The National Bank of Romania (BNR) kept the policy rate unchanged for the third consecutive meeting at 1.75% in September 2015 - a record-low.

The key rate has been cut several times since January 2014.  Average interest rates for long-term RON-denominated loans are now very low.  In September 2015:

  • 1 year housing loan interest rates averaged 8.64%, up from 8.32% a year ago but down from 12.06% in 2009-10.
  • 1-5 year interest rate fixation (IRF) loans averaged 5.71%, down from 6.8% a year earlier and from an average of 13.13% in 2009-10.
  • 5 year IRF housing loans and over averaged 3.96%, down from 5.08% a year earlier and from 10.93% in 2009-10.

Interest rates have likewise fallen on euro-denominated housing loans, which were 61% of all housing loans outstanding in September 2015.

  •  1 year IRF euro housing loans averaged 5.80%, down from 5.81% the previous month but up from 4.35% a year earlier.
  • 1 to 5 year IRF euro housing loans averaged 6.03%, down from 6.68% the previous month and 7.66% a year earlier.
  • 5 year and over IRF euro housing loans averaged 4.32%, down from 4.39% in the previous month and 4.59% a year earlier.

Small but rapidly expanding mortgage market

Romania housing loans

Romania’s mortgage market is growing rapidly. From about 3.4% of GDP in 2007, it grew to 6.75% of GDP in 2014.  From 2008 to 2014 housing loans outstanding surged by 18.3% annually.

In September 2015, the total amount of housing loans rose by 14.3% y-o-y to RON48.77 billion (€11 billion), according to the National Bank of Romania.

About 33% of the outstanding housing loans were RON-denominated in September 2015, sharply up from just 5.5% from 2010 to 2013. The share of euro-denominated loans fell from 84% in 2013, to 61%.

This shift in homebuyers´s preferences is because of central bank support for local currency lending, to protect against exchange rate risk, by limiting the "First Home" programme to RON-denominated loans. "First Home" loans are almost 50% of the total outstanding housing loans.

Rental yields are moderately good

The gross rental yield for apartments in Bucharest ranges from 6% to 6.6%, with medium-sized apartments fetching the highest rental returns, according to research conducted by the Global Property Guide in May 2015.

Medium-sized but well-refurbished apartments in Bucharest cost less per square metre (sq. m.) than larger apartments. A 120 sq. m. apartment costs around €1,680 per sq. m. while a 200 sq. m. apartment costs around €2,300 per sq. m. This largely explains the difference in returns.

Rents on apartments in Bucharest range from €7.69 per sq. m. to €11.28 per sq. m. per month. One can rent a 75 sq. m. apartment for about €530 per month.

Romania is a nation of homeowners, with a homeownership rate of over 80%. This can be partly attributed to government policies which encourage families to purchase their own houses:

  • For first-time homebuyers, the government extends a state guarantee of 50% to the banks that fund up to €60,000;
  • VAT on properties with an area of ​​up to 120 square meters is reduced to 5%.

In 2014, Romania´s total dwelling stock increased by 12% from 2000, to about 8.84 million units, according to the NIS.

Construction activity recovering

Romania residential building permits

Bucharest´s residential stock reached more than 26,000 units by end-2014, up 18% from a year earlier and the largest addition to the housing inventory since the global crisis, according to Colliers International.  Major projects in the capital include the Militari Residence, Cosmopolis, Confort Urban, City Point, Timisoara 58, and Onix Residence, among others.

In 2014, the total number of residential building permits nationally fell by just 0.3% y-o-y to 37,672 units, according to the National Institute of Statistics (NIS). On the other hand, the total useful area of residential building permits rose by 4.2% y-o-y to almost 7.2 million sq. m..

Then during the first three quarters of 2015, residential building permits rose by 5.2% from the same period last year, according to the NIS. The total useful area of residential building permits soared by 16.6% y-o-y to 6.2 million sq. m..  For an instance, Citadela Residence, a special residential complex in the city of Cluj-Napoca, has been recently launched. Real estate developer Construct Aprodex has also invested about €10 million in a housing estate in Bucharest in early-2015.

Political tension remains, amidst anti-corruption drive

Romania was under communist rule for almost four decades after the end of the World War II. The communist rule finally ended when Nicolae Ceausescu was executed in 1989.

A centrist government came to power in 1996, finally ending the dominance of the ex-communists. However, political tension hindered the centrist government´s attempts at economic reform. In 2000, the left returned to power when Ion Iliescu was re-elected as president, but he also failed to initiate sufficient reforms to spur investment and fight the serious problem of corruption.

Centrist alliance leader Traian Basescu, elected president of Romania in November 2004, vowed to speed up EU-oriented reforms. The country joined NATO in late March 2004, and joined the EU in January 2007.   Yet despite Basescu´s re-election in 2009, corruption remained a key issue.

The economic crisis and after

Romania suffered severely during the global financial meltdown, with real GDP contracting by 7.1% in 2009, and by another 0.8% in 2010.   Basescu´s imposition of austerity response to the crisis made conditions intolerable for many, resulting in many demonstrations and the collapse of his popularity. Real GDP grew by a meagre 1.1% in 2011.  In 2012 economic growth slowed sharply to just 0.6%.

In 2012, the country went through three governments. Prime Minister Victor Ponta replaced Mihai-Razvan Ungureanu, who in February 2012 had succeeded Emil Boc, who was forced to resign amid violent protests at his government´s drastic public spending cuts.

Thousands of laid-off workers took to the streets in protest against mass layoffs, and generally the country has been in ferment.

Romania gdp inflation

Somewhat of a cross-current to the anti-austerity demonstrations was an explosion of outrage against corruption targeting principally the beneficiaries of the anti-austerity protests, Ponta´s Social Democratic Party (PSD).  In December 2013 public outrage was caused by MPs passing a new Penal Code giving themselves exemption from prosecution, primarily pushed by Ponta´s PSD. The outrage was compounded in August 2014 by a law making it legal for MPs to switch parties ("Black Thursday").

The power struggle between PM Ponta and President Traian Basescu, known as the "War of the Palaces", sapped foreign investors’ confidence, and boosted borrowing costs.

In December 2014 Iohannis became president, the first ethnic German president of Romania.  Since his election there have been a series of arrests for corruption, and increased support for the National Anticorruption Directorate (DNA).  In March 2015 former Finance Minister Darius Valcov was arrested (though in June the Supreme Court ordered his release to stand trial in conditions of freedom).  In June 2015, prosecutors questioned Ponta on suspicion of forgery, tax evasion and money laundering, prompting President Iohannis to demand his resignation.  In September 2015, prosecutors formally indicted Ponta on corruption charges.

The economic outlook is good

Romania unemployment

Romania (GDP/cap US$9,981 in 2014, population almost 20 million) is the country with the highest poverty levels in the EU. More than 30% of the population live on less than $5 per day.

Yet there is much good news. The economy is back on track, and is expected to expand by 3.4% this year, and by another 3.9% in 2016, according to the IMF.

The country’s budget deficit is projected to fall to 1.86% of GDP this year, from 2.2% of GDP in 2014. In September 2015, Romania’s national budget recorded a surplus of €1.3 billion (0.87% of GDP), up from a surplus of just €90 million (0.06% of GDP) in the same period last year.

Unemployment stood at 6.8% in September 2015, unchanged over the past six months, but slightly up from 6.7% in the same period last year, according to the NIS.

Inflation was -1.5% in September 2015. Inflation slowed sharply to about 1.45% in 2014, from 4% in 2013, 3.3% in 2012, 5.8% in 2011, and 6.1% in 2010, according to the IMF.



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