Romanian housing market remains robust, but there are storm clouds ahead
Lalaine C. Delmendo | March 02, 2019
Romania’s house prices continue to rise, albeit at a much slower pace. Demand is now weakening, amidst rapidly rising interest rates. Economic growth, while it remains robust, has decelerated sharply from the previous year.
The average selling price of apartments in Romania rose by 6.44% (3.32% inflation-adjusted) to €1,239 (US$ 1,415) per square metre (sq. m.) in 2018 from a year earlier, based on the figures from imobiliare.ro. However, this is actually a market deceleration - house prices rose by 10.41% in 2016, and by 10.86% in 2017.
During the latest quarter nationwide house prices rose by 1.56% (1.13% inflation-adjusted) (q-o-q) in Q4 2018.
All major cities in the country saw house price rises during 2018:
- In Bucharest the average selling price of apartments rose by 6.04% (2.93% inflation-adjusted) y-o-y to €1,335 (US$ 1,525) per sq. m.
- In Cluj-Napoca, Romania’s fourth most populous city, apartment prices sharply rose by 6.73% (3.6% inflation-adjusted) y-o-y to €1,555 (US$ 1,776) per sq. m.
- In Timisoara, the average selling price of apartments went up by 4.77% (1.7% inflation-adjusted) to €1,207 (US$ 1,378) per sq. m.
- In Brasov, the average selling price of apartments soared 9.43% (6.23% inflation-adjusted) to €1,102 (US$ 1,258) per sq. m.
- In Constanta, the country’s oldest city, apartment prices rose by just 2.01% (fell by 0.98% when adjusted for inflation) to €1,117 (US$ 1,276) per sq. m.
Demand is weakening. In Q3 2018, the demand for residential dwellings (including both houses and apartments) in Romania’s largest regional centres fell by 2% from a year earlier, according to real estate intelligence platform Analize Imobiliare.
On the other hand, residential construction continues to rise. In 2018, the total number of residential building permits in Romania rose by 2.6% to 42,694 units from a year earlier, according to the National Institute of Statistics (INS). Likewise, the area of residential building permits issued in 2018 also increased 9.5% y-o-y to 10.67 million sq. m.
Romania’s economy grew by a robust 3.6% in 2018. But this was a deceleration from 2017´s record 7.3% growth, as the effect of tax breaks and wage increases have faded, according to the European Commission (EC). The economy is expected to expand by about 3.8% this year.
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 6.5%, 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 tolerated by the government.
Then came the euro-crisis. GDP plunged by 7.1% in 2009 and fell by another 0.8% 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 finally 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, and by another 10.86% (8.06% inflation-adjusted) in 2017.
HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: imobiliare.ro, Global Property Guide|
Residential demand is weakening
In Q3 2018, the demand for residential dwellings in Romania’s largest regional centres fell by 2% from a year earlier, according to real estate intelligence platform Analize Imobiliare.
Over the same period:
- In Bucharest, demand for houses and apartments increased by a meagre 1% y-o-y to 80,400 units
- In Constanta, total demand plunged 18% y-o-y to 14,200 units
- In Cluj-Napoca, demand rose by 13% y-o-y to 14,300 units
- In Timisoara, demand fell by 3% y-o-y to 15,900 units
- In Brasov, demand fell by 7% y-o-y to 14,800 units
- In Iasi, demand fell by 9% y-o-y to 11,800 units
In fact, in Q4 2018, the volume of housing searches dropped 11% from the same period last year, according to imobiliare.ro.
Residential construction rising modestly
In 2018, the total number of residential building permits in Romania rose by 2.6% to 42,694 units from a year earlier, according to the National Institute of Statistics (INS) – from a y-o-y growth of 7.6% in 2017 and a decline of 1.2% in 2016. Likewise, the area of residential building permits issued in 2018 also increased 9.5% y-o-y to 10.67 million sq. m.
In Romania’s major cities:
- In Bucharest, residential building permits fell by 2.1% y-o-y to 745 units in 2018
- In Constanta, permits surged 15.2% y-o-y to 1,753 units last year
- In Cluj, permits rose by 10.7% y-o-y to 1,885 units in 2018
- In Timisoara, permits rose by 6.2% y-o-y to 3,045 units in 2018
- In Brasov, permits increased strongly by 21.5% y-o-y to 1,029 units last year
- In Iasi, permits fell by 10.1% y-o-y to 2,329 units in 2018
Mortgage rates rising sharply
The National Bank of Romania (BNR) kept its policy rate unchanged at 2.5% in January 2019, after three consecutive rate hikes in 2018, amidst a moderation in inflationary expectations and economic slowdown. The deposit facility rate and the lending facility rate were also left unchanged, at 1.5% and 3.5%, respectively.
Unsurprisingly, interest rates for RON-denominated housing loans are also rising sharply.
For new business:
- Floating rate and up to 1 year initial rate fixation (IRF): 5.67% in December 2018, up from 4.47% a year ago
- Over 1 and up to 5 years IRF: 5.97%, up from 4.37% a year earlier
- Over 5 and up to 10 years IRF: 6.42%, up from 5.09% a year earlier
- Over 10 years IRF: 6.03% in December 2018, sharply up from last year’s 3.69%
For outstanding loans:
- Up to 1 year maturity: 6.2% in December 2018, slightly up from 6.04% a year ago
- Over 1 and up to 5 years maturity: 5.77%, up from 4.9% a year ago
- Over 5 years maturity: 5.67%, up from last year’s 4.19%
Around 66.3% of outstanding housing loans were RON-denominated in December 2018, a huge increase from just 5.5% from 2010 to 2013. Euro-denominated housing loan interest rates accounted for 31.1% of total outstanding housing loans in December 2018, down from 37.7% a year earlier and around 82% from 2010 to 2013.
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 is booming
Romania’s mortgage market remains small by international standards, at just 7.82% of GDP in 2018. From 2008 to 2017 housing loans outstanding have grown by more than 17% 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.
Indeed after the law’s implementation, banks raised their required down payment from 15% to 30% - 35% of the sale price. And as did lead to a decline in mortgages, some banks reduced their down payments again to 15% - 25% of the sale price.
However mortgage growth has not stalled. Housing loans increased by 11.1% y-o-y in December 2018 to RON 73.48 billion (US$ 17.67 billion), 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.
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.
Rental yields in Bucharest are good
Gross rental yields for apartments in Bucharest are good, ranging from 6% to 6.24%, with smaller apartments having the highest rental returns, according to the Global Property Guide research.
A 70 sq. m. apartment in Bucharest can be rented for around €550 (US$ 628) 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 over 80%. 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’s total dwelling stock stood at around 9 million units last year, about 14% larger than in 2000, according to the National Institute of Statistics (NIS).
Romania economy remains robust; but the government´s budget deficit exceeds the 3% ceiling
Romania’s economic growth remained robust in 2018, but decelerated sharply from the previous year’s record growth, as the effect of the tax breaks and wage increases started to fade. In 2018, the economy grew by about 3.6% in 2018 from a year earlier, after annual growth rates of 7.3% in 2017 and 4.8% in 2016, according to the European Commission (EC).
The Romanian government expects the economy to expand by a robust 5.5% this year, mainly backed by strong household consumption. However, international bodies such as the European Commission and International Monetary Fund (IMF) are more conservative, projecting a 2018 GDP growth rate for Romania of 3.8% and 3.4%, respectively.
The country recorded a budget deficit of about 3.3% of GDP in 2018, up from the previous year’s 2.9% shortfall and the biggest deficit since 2012, according to the EC.
The increased deficit was mainly due to the country’s expansionary fiscal stance. Some of the government’s recent measures include:
- Reduction of VAT from 20% to 19% beginning January 1, 2017
- Elimination of the 1% special construction tax
- Ratification of the unified wage law (UWL), raising all public wages by 25% in January 2018
- Lowering personal income tax from 16% to 10%
As a result of fiscal easing, the EC expects that Romania’s deficit will increase further to 3.4% of GDP this year and to 4.7% of GDP in 2020.
In December 2018, the seasonally-adjusted unemployment rate was 3.8%, down from 3.9% in November and 4% in October and actually the lowest level in more than two decades, according to INS.
The total number of unemployed persons in Romania fell to 349,700 in December 2018, down from last year’s 418,744 unemployed people.
Inflation stood at 3.3% in December 2018, slightly lower than the previous month’s 3.4% and the lowest level in a year. Inflation is projected at 3.5% this year, according to the EC.
On January 2019, the Romanian Leu (RON) recorded a new historic low against the euro, with the exchange rate at around RON 4.7023 per euro. The currency depreciation is mainly attributed to the growing skepticism among investors about the government’s expansionary policies.
Official toleration of corruption is raising the political temperature
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. Since Iohannis’ election there have been a series of arrests for corruption, and increased support for the DNA, which has charged or convicted no less 18 ministers from governments that have been in power in Romania since 2004, as well as thousands of lower-level 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 is 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 18, 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 suggests to decriminalize abuse of office with financial damage worth EUR 200,000 and below, arguing that criminal sanctions should apply only when the damages are "substantial". The bill also propose perpetrators to serve only three years of jail time, and those with severe illness or are over 60 years old to 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, as 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 Viorica Dancila, a former member of European Parliament, who is now Romania’s first woman prime minister.
Romania assumed the EU Council Presidency on January 1, 2019, the first time since it joined the bloc in 2007. But the Romanian government has repeatedly faced criticism from Members of Parliament (MEP) about the rule of law, corruption scandals, and alleged civil rights abuses in the country.
Just recently, EU Commission President Jean-Claude Juncker warned the Romanian government not to press ahead with a planned law that would grant amnesty to politicans who have been imprisoned for corruption – a move undermines EU “essentials” and that could rekindle protests against decriminalizing corrupt acts.
“It would be a step backwards,” said Juncker.
- Romanian Residential Market Report Q3 2018 (Analize Imobiliare):http://www.analizeimobiliare.ro/wp-content/uploads/2018/11/Raport-Q3_2018_digital-ENG-1.pdf
- Romania’s inflation rate slows down to 3.3 pct at end-2018 on cheaper fuels (Business Review): http://business-review.eu/business/romanias-inflation-rate-slows-down-to-3-3-pct-at-end-2018-on-cheaper-fuels-194642
- Romania’s unemployment rate falls to decades-low level (Business Review): http://business-review.eu/business/romanias-unemployment-rate-falls-to-decades-low-level-195686
- Romanian Prime Minister Mihai Tudose reigns(Deutsche Welle): https://www.dw.com/en/romanian-prime-minister-mihai-tudose-resigns/a-42158583
- Economic forecast for Romania(European Commission):https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/romania/economic-forecast-romania_en
- EU warns Romania over corruption amnesty (EU Observer):https://euobserver.com/political/143879
- Moderate to good rental yields in Bucharest, Romania (Global Property Guide): https://www.globalpropertyguide.com/Europe/Romania/Rental-Yields
- Brawl at house rises in 2018: growth slowed down by half!(Imobiliare.ro): https://www.imobiliare.ro/imoexpert/frana-la-scumpirile-locuintelor-in-2018-ritmul-de-crestere-a-incetinit-la-jumatate_db/
- Real Estate Index (Imobiliare.ro): https://www.imobiliare.ro/indicele-imobiliare-ro
- World Economic Outlook Database October 2018 (International Monetary Fund):https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/index.aspx
- NBR Board decisions on monetary policy (National Bank of Romania): http://www.bnr.ro/page.aspx?prid=15837
- Interactive Database (National Bank of Romania): http://www.bnr.ro/Interactive-database-1107.aspx
- Statistical Databases (National Institute of Statistics):http://statistici.insse.ro:8077/tempo-online/#/pages/tables/insse-table
- Romanian fin min analysts confirm forecast of 5.5% GDP growth in 2019 (SeeNews):https://seenews.com/news/romanian-fin-min-analysts-confirm-forecast-of-55-gdp-growth-in-2019-641171
- MEPs voice concern over Romanian EU Council presidency (The Parliament Magazine): https://www.theparliamentmagazine.eu/articles/news/meps-voice-concern-over-romanian-eu-council-presidency
- Romanian property market rising fast; yields still good - December 02, 2016
- Another East European sizzler - Romania’s housing market is heating up strongly, despite the political crisis - November 06, 2015