Slovenian housing market rebounded

 

House prices in Slovenia appear to be finally bouncing back, though conflicting signals from two major statistical sources make interpretation difficult. 

The house price index published by the Statistical Office of the Republic of Slovenia (SORS) rose 4.11% during the year to the first quarter of 2011, the highest rise since the financial crisis. When adjusted for inflation, house prices increased by 2.34%.  The data is largely collected from notaries and the tax administration.

In Ljubljana, the capital, apartment prices were up 4.12% year-on-year to Q1 2011 while the rest of Slovenia experienced a price fall of 0.64% over the same period.

By property type, nationally:

  • Existing flats rose 0.96% year-on-year to Q1 2011
  • Existing family houses fell 0.27%
  • Newly built flats rose 8.70%
  • Newly built family houses rose 6.37% over the same period.

During the latest quarter, house prices rose an impressive 4.66% nationally, or 4.82% adjusted for inflation, according to the Statistical Office.   

However SLONEP, Slovenia’s most comprehensive real estate portal, reports that over the year to end Q2 2011 average prices per square metre of apartments in Ljubljana fell by 3.06% in real terms, across all classes (from studio type, 1-, 2-, 3-, 4-, 5 rooms or more). Price increases were recorded only for 4 room apartments at 1.93% year-on-year, inflation-adjusted.

During the year to end Q1 2011, the number of transactions fell 18.56% to 1,623, suggesting a wait-and-see approach by sellers reluctant to lower prices, and buyers who think prices will drop further.  According to Eva Jakopin of Elite Property Slovenia, Slovenian buyers are hesitant buyers; those that are serious take up to six months to make the decision to buy.

However properties along Slovenia’s coast have seen increasing demand from foreigners. Foreigners discovered how picturesque Slovenia is after the country’s accession to the European Union (EU) in 2004.

Strong growth in the past

Slovenia, a small country, with only about 2 million people, experienced strong economic growth from 2000-2007, with an impressive average GDP growth rate of 9%.

In 2004, it made the transition from being a World Bank borrower, to being a donor-partner. During the following three years, Slovenia’s GDP grew to €36 billion in 2007, from €27 billion in 2004.

Slovenia’s economy is driven by exports, which account for 70% of GDP. After its accession to the European Union in 2004, it became even more open to trade with other EU member countries, and exports grew at an average rate of 14.5% during 2004-2007. Most exports are to Germany, Italy, Croatia, Austria, France and Russia. The manufacturing sector accounts for most employment. In the last few years, there has also been a huge increase in tourist visits to Slovenia.

Wages rose 3.6% in 2005, and 4.1% in 2007. Inflation stayed below 4% from 2004 to the third quarter 2007. Unemployment fell to 6.43% in Q3 2008, down from 13% in 1999, but shot up again to 11.1% in November 2010. The rate is expected to continue rising. The government reported that the number of unemployed increased 15.6% y-o-y to January 2011.

Cautious mortgage market

Slovenia’s mortgage market is still relatively small, at 9% of GDP in 2008, but has been growing rapidly, and is up from 3% in 2004.

There are no special mortgage banks in Slovenia, though 19 commercial banks and 3 savings banks offer mortgages. Nonetheless, 233 banks from European Economic Areas (EEA states) are authorized to perform mortgage services directly in Slovenia or through a branch. The average loan-to-value ratio is 50%, i.e., households have to cough up a 50% down payment to qualify for a mortgage.

Slovenia’s mortgage market, though improving, plays a weak role in housing finance, according to Matej More of the Finance Ministry. The reason is the underdevelopment of land registration system, the foreclosure procedure, and other problems in the legal environment.

Mortgages are secured on property bought in Slovenia, not on property outside the country. Normally, a 10% deposit is required to secure a property. According to Slovenian law, if the seller backs out, he is liable to pay twice the deposit.

Housing loans with interest rates fixed for 5 to 10 years or more are now available, but almost 82% of loans in 2008 were variable rate, according to the Bank of Slovenia.

Interest rate movement

After Slovenia’s accession to the European Union in 2004, interest rates fell to an average of 5% in 2006, from 10% in 2003. However, in 2007 they started to rise again to 6%, and then to 7% in 2008, almost the same as the 10 years fixed-rate mortgage rate.

Lukewarm foreign demand

Slovenia’s real estate market has been completely open to EU nationals since it joined the EU in 2004. This was expected to usher in thousands of EU citizens eager to buy properties in Slovenia, but only a handful came, due to higher real estate prices in Slovenia compared to other EU countries, according to Sonja Gračanić of Dodoma Real Estate.

“When you explain to them (potential buyers) the realities, when they look at the prices… which are not that cheap… and mostly they’re thinking about renting it out and getting some money. And when they work out what they get in rent, it doesn’t actually add up,” said Diana Evans, a Briton who was among the first wave of foreign land buyers in Slovenia. Slovenia’s very short coastline is another negative.

During the first year after liberalization, only about 500 properties were sold to EU citizens. And from January 2006 to April 2009, foreigners bought only 2,026 properties according to the Slovenia Tax Administration (DURS). Most buyers were from United Kingdom (39%), Italy (29%), Austria (8%) and Germany (6%). Only two banks offer mortgages to foreign investors. One is the Volksbank of Austria, which offers 70% mortgages. The other is SKB Banka, which offers up to 50% mortgage credit.

Even before the recent house price boom, rental yields in Slovenia were relatively low.

In July 2008, rental yields for properties in central Ljubljana ranged from 4.3% to 5.5%, according to the Global Property Guide. Property prices were around €2,926 to €3,737 per sq. m. while rents are around €491 per month for a small (40 sq. m.) unit. Larger units have much higher rents that can reach up to €2,175 per month (for a 150 sq. m. flat).

Most Slovenes own their houses; the owner-occupancy rate was 82% in 2005.

Economic slowdown

Slovenia’s economy is fueled by exports and foreign investments, and its high level of trade openness made Slovenia sensitive to the global economic crisis. To a great extent, economic growth is largely dependent on the movements in its exports, primarily to its main trading partner, Germany, which constitutes around 19% of Slovenia’s exports.

Slovenia’s GDP grew by 1% in 2010, with increased exports to Germany the only contributor to growth - a significant improvement, however, compared to the economy’s 8.1% contraction in 2009, its worst crisis since independence.

Slovenia’s recovery is expected to remain weak, with economic growth of around 1.7% to 2% in 2011

The government’s ability to pump prime the economy is hampered by the limits set in the eurozone. From a balanced budget in 2007, the budget deficit rose to 5.4% in 2010. In line with the EU deficit limit of 3% of GDP by 2012, Slovenia is planning to bring its deficit down to 4.7% in 2011.

In 2010, the government froze public sector wages and proposed radical reforms to the labor market and revisions to the pension system. The plans failed to push through, as unions demanded a referendum on pension reforms. The pension reform plan is now pending in parliament.