Improving foreign demand
Lalaine C. Delmendo | February 24, 2022
However when adjusted for inflation, new residential prices actually fell 1.8% y-o-y in Q2 2022. The wide disparity between the nominal and real figures is due to surging inflation, which rose to 15% in August 2022 – the highest level in almost a decade.
On a quarterly basis, the average price of dwellings rose strongly by 8.7% (4.05% inflation-adjusted) in Q2 2022.
Demand is recovering, especially from foreign homebuyers. In the first half of 2022, foreign direct investment in real estate rose sharply by 122.7% to €201.55 million compared to the same period last year, according to the July 2022 central bank report.
Residential construction activity is also showing signs of improvement. In H1 2022, the number of dwelling permits rose by 150.6% to 812 units from the same period last year, after annual declines of 50% in 2021, 17.9% in 2020 and 32.4% in 2019, according to the Statistical Office of Montenegro.
Despite this, the outlook for Montenegro's housing market remains clouded with heightened uncertainties caused by the Russian invasion of Ukraine and the ongoing political crisis in the country.
“In early 2022, food and energy price increases were exacerbated further by the fallout of Russia's war of aggression against Ukraine. The war is also expected to have a negative impact on Montenegro's tourism industry, as Russians and Ukrainians constitute 20% of total visitors,” said the European Commission (EC).
“On top of this, a political crisis materialised on 4 February 2022, when the government lost a vote of confidence 14 months after being formed. A new minority government was established three months later, but political uncertainty persists,” the EC added.
As such, both the International Monetary Fund (IMF) and the European Commission expect Montenegro's economic growth to slow to 3.8% this year – a sharp decline from the 12.4% expansion in 2021. Likewise, the World Bank has recently downgraded its 2022 growth forecast for Montenegro to 3.6%, from its initial estimate of 5.9%.
Analysis of Montenegro Residential Property Market »
High prices in Montenegro
Prices in Montenegro are quite high, although they seem to have fallen over the past year. Buying prices for coastal houses average around €2,870 per square metre, or around €266 per square foot.
We are unable to give yields figures, because lets tend to be seasonal, and there is no basis for long-term yields calculations.
Taxes are moderate in Montenegro
Rental Income: Rental income is taxed at a flat rate of 9%, with an optional lump-sum deduction of 40% in lieu of actual costs.
Capital Gains: Capital gains realized from sale of real property in Montenegro are taxed at a flat rate of 9%.
Inheritance: Inheritance of first degree relatives (spouses and direct descendants) is not taxed. Other heirs are liable to pay 3% tax on their share of the estate.
Residents: Residents are taxed on their worldwide income at a flat rate of 9%.
Buying costs are low in Montenegro
Roundtrip transaction costs, i.e., the total cost of buying and selling a property, are around 6.57% to 24.02% of the property value. The buyer pays the transfer tax of about 3%. The agent’s commission ranges from 3% to 5%, usually paid by the seller.
The transaction cost on newly built property is much higher because 19% VAT is levied instead of the transfer tax.
Montenegro’s tourism-reliant economy
The economy’s major growth driver is tourism. From 2013 to 2019, Montenegro’s economy expanded by about 3.6% every year, thanks to booming tourism, helped also by infrastructure projects such as construction of the Bar-Coljare highway. Over the same period, tourist arrivals increased by an annual average of 9.2%.However in 2020, tourism ground to a halt, due to Covid-19 pandemic. Tourist arrivals plunged by 83.2% y-o-y to just 444,065 people in 2020, from more than 2.6 million arrivals in 2019, according to the Statistical Office of Montenegro. In collective accommodation (camping sites, tourist resorts, vacation facilities, boarding houses, motels, etc.), tourist arrivals fell sharply by more than 79% y-o-y to 268,878 people in 2020.
As a result, the overall economy contracted by a huge 15.3% in 2020, its worst performance in recent history.
During 2021, Montenegro’s economy bounced back strongly, registering a real GDP growth of 12.4% - the highest rate among the six Western Balkan nations. The strong growth was driven primarily by strong private consumption and the gradual recovery in the tourism sector amidst the easing of pandemic-related restrictions. Tourist arrivals almost quadrupled in 2021 from a year earlier to 1,553,558 people – but still far below its pre-pandemic levels.
Both the International Monetary Fund (IMF) and the European Commission expect Montenegro’s economic growth to slow to 3.8% this year, mainly due to the adverse impact of the war in Ukraine. Likewise, the World Bank has recently downgraded its 2022 growth forecast for Montenegro to 3.6%, from its initial estimate of 5.9%.
“In early 2022, food and energy price increases were exacerbated further by the fallout of Russia’s war of aggression against Ukraine. The war is also expected to have a negative impact on Montenegro’s tourism industry, as Russians and Ukrainians constitute 20% of total visitors,” said the European Commission.
The country’s inflation soared to 15% in August 2022, almost five times the previous year’s 3.1% and the highest level recorded since October 2002, according to figures from the Statistical Office of Montenegro.
In the second quarter of 2022, nationwide unemployment stood at 14.6%, down from 16.8% in the previous quarter and 17.1% a year earlier.
The country’s fiscal deficit fell to 2% of GDP in 2021, from a whopping 11.1% of GDP in 2020. Likewise, the government’s gross debt narrowed to 80.6% of GDP last year, from 103.5% in 2020.