House price rises decelerating in Romania

Lalaine C. Delmendo | January 25, 2021

Romania’s house prices continue to rise, albeit at a slower pace, amidst a struggling economy due to the pandemic. During 2020, the average selling price of apartments in Romania rose modestly by 2.44% y-o-y (0.95% inflation-adjusted) to €1,371 (US$ 1,662) per square metre (sq. m.), a sharp slowdown from an annual growth of 8.23% in 2019, based on the figures from imobiliare.ro. It is the weakest growth since 2014.

On a quarterly basis, nationwide house prices rose by 5.14% (4.98% inflation-adjusted) in Q4 2020.

Romania house prices

Romania’s economy is estimated to have contracted by only 5.2% in 2020, based on the European Commission’s forecast, following y-o-y expansions of 4.2% in 2019, 4.4% in 2018, 7.1% in 2017 and 4.8% in 2016. The economy is projected to grow by 3.3% this year.

Nevertheless all major cities in the country reflect the nationwide trend of decelerating house price growth during 2020:

  • In Bucharest the average selling price of apartments rose by a meager 0.85% (-0.42% inflation-adjusted) y-o-y to €1,425 (US$ 1,727) per sq. m, a sharp slowdown from the previous year’s 5.84% growth.
  • Cluj-Napoca, Romania’s fourth most populous city, saw the biggest y-o-y increase in apartment prices of 7.48% (6.13% inflation-adjusted) to an average of €1,840 (US$2,230) per sq. m. Though it is still lower than 2019’s increase of 10.1%.
  • In Brasov, the average selling price of apartments rose by 4.92% (3.61% inflation-adjusted) to €1,236 (US$1,498) per sq. m, down from the previous year’s 6.9% rise.
  • In Constanta, the country’s oldest city, apartment prices rose by 2.48% (1.19% inflation-adjusted) to €1,240 (US$1,503) per sq. m, a sharp slowdown from the previous year’s 8.33% rise.
  • In Timisoara, the average selling price of apartments went up by 1.49% (0.22% inflation-adjusted) to €1,292 (US$1,566) per sq. m, also a slowdown from a y-o-y increase of 5.47% in 2019.

Figures from the real estate intelligence platform Analize Imobiliare showed that the demand for residential dwellings in Romania’s six biggest cities increased 14% to about 154,500 units in Q3 2020 from the previous quarter, but still down by 12% from a year earlier.

In the first eleven months of 2020, residential building permits in Romania fell by 4% from a year earlier to 37,781, according to the National Institute of Statistics (INS) – after a slight y-o-y decline of 0.4% in 2019 and annual growth of 2.6% in 2018 and 7.6% in 2017. Likewise, the area of residential building permits issued fell by 3.4% y-o-y to 9.68 million sq. m. in Jan-Nov 2020.

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.

History: Romania’s great housing market collapse

Romania’s economy grew robustly from 2001 to 2008, with an average annual real GDP growth rate of 6.6%, according to the IMF. 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 tolerated by the government.

Then came the euro-crisis. Romania’s GDP plunged by 5.5% in 2009 and fell by another 3.9% in 2010. House prices plunged by 20.62% (-24.18% inflation-adjusted) y-o-y in 2009 and by another 15.88% (-22.07% inflation-adjusted) in 2010. The housing market remained depressed for the next four years, with prices falling every year from 2011 to 2014.

Overall, house prices fell by more than 57% from 2008 to 2014.

The housing market started to recover in 2015, with prices rising by 6.73% (7.46% inflation-adjusted) from a year earlier, thanks to improving economic conditions. The housing market has continued to strengthen since then, with house prices surging by 10.41% (10.51% inflation-adjusted) in 2016, by 10.86% (8.06% inflation-adjusted) in 2017, by 6.44% (3.32% inflation-adjusted) in 2018 and by another 8.23% (4.02% inflation-adjusted) in 2019.

However due to the COVID-19 pandemic, which has adversely impacted Romania’s overall economy, house price growth slowed sharply to 2.24% in 2020 (less than 1% when adjusted for inflation).

HOUSE PRICE INDEX, ANNUAL CHANGE (%)

Year Nominal Inflation-adjusted
2009 -20.62 -24.18
2010 -15.88 -22.07
2011 -4.07 -7.02
2012 -1.31 -5.62
2013 -8.18 -9.37
2014 -0.78 -1.80
2015 6.73 7.46
2016 10.41 10.51
2017 10.86 8.06
2018 6.44 3.32
2019 8.23 4.02
2020 2.24 0.95
Sources: imobiliare.ro, Global Property Guide

Residential demand remains weak

In the third quarter of 2020, the demand for residential dwellings in Romania’s six biggest cities rose by 14% to about 154,500 units from the previous quarter but still down by 12% from a year earlier, according to real estate intelligence platform Analize Imobiliare.

Over the same period (figures from Analize Imobiliare):

  • In Bucharest, demand for houses and apartments was 85,400 units, up 8% q-o-q but still down 5% y-o-y
  • In Cluj-Napoca, demand surged by 32% q-o-q to 13,100 units but still sharply down by 31% from a year earlier
  • In Timisoara, demand stood at 15,400 units, up 28% q-o-q but down 19% y-o-y
  • In Brasov, demand was 13,700 units, up 15% q-o-q but down 19% y-o-y
  • In Constanta, total demand was 14,500 units, up 8% q-o-q but down 14% from a year earlier
  • In Iasi, demand was 12,400 units, up 31% q-o-q but down 9% y-o-y

In the first three quarters of 2020, the total number of real estate transactions in Romania was almost steady at about 382,000 units compared to the same period in 2019.

Residential construction falling a little

In the first eleven months of 2020, residential building permits in Romania fell by 4% from a year earlier to 37,781, according to the National Institute of Statistics (INS) – after a slight y-o-y decline of 0.4% in 2019 and annual growth of 2.6% in 2018 and 7.6% in 2017. Likewise, the area of residential building permits issued fell by 3.4% y-o-y to 9.68 million sq. m. in Jan-Nov 2020.

By region:

  • In Bucharest-Ilfov, residential building permits fell by 6.5% y-o-y to 4,284 units in the first eleven months of 2020
  • Southeast saw the biggest y-o-y drop in residential permits of 12.1% to 4,408 units
  • At the Central region, permits fell by 9.5% y-o-y to 3,324 units
  • In Southwest Oltenia, permits fell by 8.3% y-o-y to 2,953 units
  • In the Northwest, permits were up by 4.3% y-o-y to 6,086 units
  • In the Northeast, permits were unchanged at 7,380 units
  • In South Muntenia, permits were also steady at 5,776 units
Romania residential building permits

In 2019, dwelling completions rose strongly by 13% to 67,488 units, following annul increases of 11.9% in 2018, 2.2% in 2017, 11.1% in 2016, 4.4% in 2015 and 3.2% in 2014, according to the INS.

Dwelling stock stood at 9.09 million in 2019, up slightly by 0.7% from a year earlier.

Romania dwelling stock completions

Interest rates are falling

The National Bank of Romania (BNR) cut its policy rate by 25 basis points to 1.25% in January 2021, in an effort to buoy economic activity amidst the ongoing COVID-19 pandemic. The deposit facility rate and the lending facility rate were also cut by 25 basis points, at 0.75% and 1.75%, respectively.

Interest rates on new RON-denominated housing loans:

  • Floating rate and up to 1 year initial rate fixation (IRF): 4.81% in November 2020, down from 5.35% a year ago
  • Over 1 and up to 5 years IRF: 5.27%, down from 5.96% a year earlier
  • Over 5 and up to 10 years IRF: 4.18%, sharply down from 6.29% a year earlier
  • Over 10 years IRF: 4.9% in November 2020, down from last year’s 5.48%

Romania interest rates ron denominated housing loans

For outstanding loans:

  • Up to 1 year maturity: 4.64% in November 2020, down from 6.13% a year ago
  • Over 1 and up to 5 years maturity: 4.99%, down from 5.56% a year ago
  • Over 5 years maturity: 4.77%, down from last year’s 5.56%

For euro-denominated loans, the average interest rate for those with 1-5 years maturity was 4.27% in November 2020, down from 5.42% a year earlier, according to the BNR. Likewise, interest rates for loans with over 5 years maturity fell slightly to 3.65% from 3.72% a year ago.

Romania interest rates eur denominated housing loans

Almost 76% of outstanding housing loans were RON-denominated in November 2020, up from 71% in November 2019 and a huge increase from just 5.5% from 2010 to 2013. Euro-denominated loans accounted for 22.6% of outstanding housing loans in November 2020. The Central Bank has shifted homebuyers’ preferences to local currency by limiting the "Prima Casa" or "First Home" programme to RON-denominated loans ("First Home" loans are almost 50% of total outstanding housing loans).

The mortgage market continues to grow

Romania’s mortgage market remains small by international standards, at just about 8.4% of GDP in 2020. From 2008 to 2019 housing loans outstanding have grown by 16% annually.

It might have been expected that mortgage growth would have been stalled by the passage, in early 2016, of the “Legea darii in plata” law, allowing a borrower to close his mortgage debt by handing back his property to the bank, with no other obligations. However mortgage growth has not stalled. Housing loans still rose strongly by 12.5% in 2016, 13.2% in 2017, 11.1% in 2018 and 10.5% in 2019.

And despite the coronavirus crisis, housing loans outstanding increased 9.7% y-o-y to RON 88.19 billion (US$ 21.89 billion) in November 2020, according to the National Bank of Romania.

The mortgage market’s strong growth has been buoyed by the government’s “Prima Casa” (First Home) programme, launched in May 2009, which supports first home purchasers who have not previously had a mortgage.

Romania house loans

The government guarantees 80% of the value of the loan, up to a maximum credit amount of 60,000 euros, and there is no age limit for the beneficiaries. The credit period is 10-30 years. Accepted earnings are the standard accepted by banks: earnings from salaries, pensions, copyrights, life annuities, dividends, and earnings from independent activities, but not rental income.

In 2020, the Prima Casa programme received a budget of about RON 2 billion (US$ 496.3 million), just as in the previous year, in an effort to boost mortgage lending especially to young families wanting to buy their first property. It was implemented through fifteen banks: BRD-GSG, BCR, Banca Transilvania, CEC Bank, ING Bank, Raiffeisen Bank, OTP Bank, Banca Romaneasca, Unicredit Bank, Garanti Bank, First Bank, Marfin Bank, Credit Agricole, Leumi Bank, Intesa Sanpaolo Bank.

Rental yields in Bucharest are good

Gross rental yields for apartments in Bucharest are good, ranging from 6% to 8%, with smaller apartments having the highest rental returns, according to Global Property Guide research last year.

A 70 sq. m. apartment in Bucharest can be rented for around €550 (US$ 665) per month, while a 120 sq. m. apartment can be rented for just under a thousand euro per month.

Romania is a nation of homeowners, with a homeownership rate of more than 96%. Government policies encourage families to buy their own houses:

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

Romania exchange rate

Romania’s total dwelling stock was about 9.1 million units last year, almost 15% larger than in 2000, according to the National Institute of Statistics (NIS).

Romania’s economy struggling; public finances worsening

Romania’s economy continues to struggle. The European Commission (EC) estimates that the Romanian economy has contracted by 5.2% in 2020, following annual expansions of 4.2% in 2019, 4% in 2018, 7% in 2017, 4.8% in 2016, 3.9% in 2015 and 3.4% in 2014.

The economy is projected to grow by a modest 3.3% this year, based on the EC’s forecast.

Romania gdp inflation

Romania’s finance ministry recently revised its budget for the third time envisaging a public deficit of RON 96 billion (€19.8 billion), which is equivalent to 9.1% of 2020’s GDP – worse than its earlier projection of a shortfall of 8.6% of GDP. The EC is even more pessimistic, projecting a deficit of about 10.3% of Romania’s GDP in 2020, up from 2019’s 4.4% shortfall - and the biggest deficit in the country’s recent history.  As a result, public debt surged to 46.7% of GDP in 2020, up from just 35.3% of GDP in 2019.

In an effort to manage the country’s worsening public finances, Romania’s new centre-right government, headed by prime minister Florin Citu, recently unveiled a package which includes measures aimed at achieving a budget deficit of 7% of GDP for 2021 but at the same time continuing support to companies and employees adversely hit by the pandemic.

In November 2020, the seasonally-adjusted unemployment rate was 5.1%, slightly down from 5.3% in the previous month but up from 4% in the same period last year, according to INS. The total number of unemployed persons in Romania increased to 462,000 in November 2020.

Romania unemployment

Inflation stood at 2.1% in December 2020, sharply down from the prior year’s 4% and the least since September 2017. Thought it remains within the central bank’s target band of 1.5% to 3.5%. Inflation is projected at 2.5% this year, according to the EC.

On December 2020, the Romanian Leu (RON) depreciated again against the euro by almost 2%, reaching an average exchange rate of RON 4.8682 per euro. The currency depreciation is mainly attributed to the rapid deterioration of the country’s trade and current account balance, as well as public finances.

Political uncertainty, widespread corruption

Romania is poised between future and past. Does Romania want to be a modern state, in which politicians are elected on the basis of policies and are prosecuted and imprisoned for corruption? Or does it want to be a clientilist state, in which politics is about who you accept money from?

The two most prominent voices of the progressive future are President Klaus Iohannis, elected in November 2014, and Laura Codruta Kovesi, former head of the country’s National Anticorruption Directorate (DNA).

Iohannis was elected President in November 2014 on an anti-corruption platform. After Iohannis’ election there were a series of arrests for corruption, and increased support for the DNA, which charged many politicians, media moguls, judges and businesspeople.

However progress was set back by the Social Democratic Party’s (PSD) triumph in the December 11, 2016 Parliamentary elections. The PSD’s support is strong among the poor, whose perception is that almost all Romanian politicians are tainted, so why seemingly target the PSD?

The PSD appointed the relatively clean Sorin Grindeanu as Prime Minister. But the real power was the PSD’s Liviu Dragnea, convicted of bribery and ballot-forging during the 2012 parliamentary election and thus barred by law from becoming prime minister. One of the Grindeanu government’s first steps was to pass Emergency Ordinance 13, effectively decriminalising official misconduct in which the financial damage is less than 200,000 lei - clearly a step towards Dragnea becoming prime minister.

This unleashed a storm of popular protest and mass demonstrations. The demonstrations had their effect. Ordinance 13 was repealed and justice minister Florin Iordache resigned, a scapegoat for Ordinance 13.

However on December 2017, a group of PSD senators and deputies submitted another draft bill setting lower penalties for corruption offenses and decriminalizing some of them. Similar to Ordinance 13, the draft bill suggested decriminalizing abuse of office with financial damage worth EUR 200,000 and below, and also proposed that perpetrators should serve only three years of jail time, and those with severe illness or who were over 60 years old should be allowed to serve their sentences at home.

Just six months after becoming a premier, Grindeanu was ousted in a no-confidence vote with the PSD and its coalition partner ALDE in June 2017. Grindeanu was reluctant to resign, accusing Dragnea of seeking to "concentrate all the power in his hands". In June 2017, former Economy Minister Mihai Tudose took over as Romania’s Prime Minister, designated by President Iohannis.

However in January 2018, Tudose resigned after his own party, PSD, abandoned him in an internal power struggle with the party’s all-powerful chairman Dragnea. He was replaced by PSD’s Viorica Dancila, a former member of European Parliament, who was now Romania’s first woman prime minister.

From PSD to PNL

In November 2019, Ludovic Orban, the leader of the centrist National Liberal Party (PNL), took over as prime minister, after the divided and scandal-ridden PSD was overthrown in a no-confidence vote, and was tasked to form a transitional government until a parliamentary election is held. However barely a year after, Orban resigned over poorer-than-expected election results.

So in December 22, 2020, Iohannis designated finance minister Florin Citu to form a new government on behalf of a centre-right coalition of three parties formed around the PNL. Just a day after, the coalition got 260 votes out of 455 MPs present – 32 votes more than necessary.


Sources:

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