Slovenia’s housing market recovering, amidst surging demand
November 08, 2016
Slovenia’s property market is bouncing back. Yet though demand has risen substantially, residential construction activity remains down due to a stock overhang, and only the prices of old dwellings are rising, not newbuilds.
The nationwide price of dwellings increased slightly by 0.45% during the year to Q2 2016 (0.69% in real terms), based on figures from the Statistical Office of the Republic of Slovenia. During the latest quarter (Q2 2016) house prices rose by 1.88% (0.15% in real terms).
- In Ljubljana, Slovenia’s capital, the price index for existing flats rose by 4.23% y-o-y in Q2 2016 (4.49% in real terms). Quarter-on-quarter, the price index increased 1.8% (0.1% in real terms).
- In the rest of Slovenia, the price index for existing flats increased slightly by 0.66% during the year to Q2 2016 (0.9% in real terms). Quarter-on-quarter, the price index increased 1.7% (stable in real terms).
Demand has surged. In the second quarter of 2016, the number of dwelling transactions rose by 24.3% to 2,789 units from the same period last year, according to the Statistical Office of the Republic of Slovenia. Newbuild transactions rose by 22.8%, while existing dwelling increased 21.8%.
However, this sharp increase in demand wasn´t reflected in housing loans. Lending for house purchases rose just 3.3% to €5.66 billion in September 2o16 from the same period last year, according to the country’s central bank, the Bank of Slovenia. The Central Bank suggests that homebuyers are using their own funds more to purchase real estate, instead of using loans.
Despite this, during the first eight months of 2016, the number of dwelling permits issued for residential buildings dropped 10.1% to 1,547 units, according to the Statistical Office of the Republic of Slovenia. The floor space of dwellings authorized also fell by 10.2% to 237,050 square metres (sq. m.) over the same period.
Last year, the economy grew by a modest 2.3%, after a growth of 3.1% in 2014 and contractions of 1.1% in 2013 and 2.7% in 2012, according to the IMF. Slovenia’s economy is expected to expand by 2.3% this year and by another 1.8% in 2017.
Foreigners have been able to buy property since February 2003, on a reciprocal basis. Reciprocity is a principle verified by the Ministry of Justice (MoJ) on the basis of the Law on Reciprocity (Official Gazette No 9/99). Then following accession to the EU in 2004, EU citizens may now buy properties in Slovenia without restrictions.
Old properties good, new properties bad
There is an interesting segmentation in the property market. Existing dwellings are now recovering faster than newly built dwellings:
- The existing dwellings price index increased 1.38% during the year to Q2 2016 (1.63% in real terms). On a quarterly basis, the index rose by 2.2% in Q2 2016 (0.5% in real terms).
- The existing flat price index increased 2.16% y-o-y in Q2 2016 (2.41% in real terms). On a quarterly basis, prices rose by 1.8% in Q2 2016 but unchanged when adjusted for inflation.
- The price index of existing family houses fell slightly by 0.57% y-o-y in Q2 2016 (-0.33% in real terms). Though, prices rose by 3.1% q-o-q in Q2 2016 (1.3% in real terms).
Newly built houses continued to suffer significant price declines:
- The newly built dwellings price index fell by 4.48% in Q2 2016 from a year earlier (-4.25% in real terms). On a quarterly basis, the index rose by a meagre 0.1% but dropped 1.6% when adjusted for inflation.
- The newly built flats price index fell by 4.01% during the year to Q2 2016 (-3.78% in real terms). The index dropped 0.3% q-o-q in Q2 2016 (-2% in real terms).
The newly built family houses index fell by 7.77% during the year to Q2 2016 (-7.55% in real terms). But during the last quarter, the price index rose by 2.1% (0.3% in real terms).
After booming in early-2000s, Slovenia’s property market weakened in 2008 due to the global economic crisis. The following years were difficult. House prices fell by 0.17% in 2008 (-3.4% in real terms), by 8.12% in 2009 (-9.14% in real terms), and by another 0.15% in 2010 (-1.85% in real terms).
In 2011, house prices bounced back, increasing by 1.37% (-1.07% in real terms), but returned to slump in 2012 with prices falling 8.83% (-11.08% in real terms). House prices fell by 4.38% (-5.45% in real terms) in 2013 and by another 4.39% (-4.3% in real terms) in 2014. In 2015, the housing market started to stabilize, with house prices rising slightly by 0.1% from a year earlier (0.7% in real terms).
Housing transactions rising strongly
Demand has been surging. In the second quarter of 2016, the total number of dwelling transactions rose by 24.3% to 2,789 units from the same period last year, according to the Statistical Office of the Republic of Slovenia.
- Newly built dwelling transactions rose by 22.8% y-o-y in Q2 2016. Transactions for newly built flats rose by 31.6% while it dropped 21.6% for newly built family houses.
- Existing dwelling transactions rose by 21.8% y-o-y in Q2 2016. Existing flats, which accounted for two-thirds of all dwelling transactions, saw an increase in transactions of 21.8% over the same period. Transactions for existing family houses also increased 32.3% in Q2 2016 from a year earlier.
Housing loan interest rates continue to fall
The ECB key rate is currently at its all-time low of zero, due to a surprise 5-basis-points rate cut in March 2016, in an effort revive the ailing economy and fend off deflation. From 1.5% in July 2011, the key rate was cut seven times to 0.05% in September 2014, due to lower inflation, lacklustre economic growth, and rising unemployment.
Since the ECB started to trim the repo rate in 2012, interest rates for housing loans has been generally falling, particularly the floating rate.
Average housing loan interest rates in Slovenia in August 2016:
- Floating and IRF of up to 1 year: 1.98%, down from 2.38% in August 2015 and 3.17% in August 2014
- IRF over 1 and up to 5 years: 3.08%, down from 3.14% in August 2015 and 6.2% in August 2014
- IRF over 5 years and up to 10 years: 2.45%, down from 3.36% in August 2015 and 5.01% in August 2014
- IRF over 10 years: 2.67%, down from 3.43% in August 2015 and 4.24% in August 2014
Small mortgage market
Slovenia’s mortgage market remains small, at about 12.9% of GDP in 2015, though it has grown from 2.9% of GDP in 2004. It plays a weak role in housing finance because of structural problems - the underdevelopment of the land registration system, weak foreclosure procedures, and other problems of the legal environment, according to the Finance Ministry´s Matej More.
New housing loans rose by 41% in 2015. However, total outstanding housing loans increased by only 3.3% in 2015, after growing by an annual average of 2.6% from 2011 to 2014 and an average of 22% from 2008 to 2010.
Banks slightly relaxed their credit standards and terms on housing loans last year. The loan-to-value (LTV) ratio for new housing loans averaged 56.3% in 2015, up from 54.5% in the previous year. Housing loans with LTVs of more than 70% accounted for almost a third of the total value of new housing loans in 2015.
In September 2o16, the total lending for house purchases rose by 3.3% to €5.66 billion from the same period last year, according to the Bank of Slovenia.
- Loans for house purchases denominated in domestic currency rose by 5.7% y-o-y to €5.08 billion in September 2016
- Loans for house purchases denominated in foreign currency dropped 14% y-o-y to €573 million in September 2016
Slovenia’s banking sector is dominated by state-owned banks which control more than 40% of the market, while France’s Societe Generale, Italy’s Unicredit, and a number of Austrian banks are also present in the market.
Rental yields stable
Rents and rental yields of Ljubljana apartments have been virtually static over the past two years,according to a Global Property Guide research conducted in July 2016.
The gross rental yield for apartments in Ljubljana, i.e., the gross return on investment in an apartment if fully rented out, ranges from 4.41% to 4.77%.
In mid-2016, the average price of apartments in Ljubljana is around €2,650per square metre (sq. m). A 75-sq. m. apartment costs around €192,000 to buy, while a bigger 120-sq. m. apartment can cost as much as €342,000.
The gross monthly rental income per sq. m. is around €10.50. A typical 80-sq. m. apartment earns around €765 per month, while a 120- sq. m. apartment can earn around €1,260 per month.
Round trip transaction costs are low in Slovenia.
Modest economic growth
Slovenia´s economy, which is export-dependent, has been sluggish since the beginning of the Euro zone crisis. After growth of 4.2% annually during the good years from 2000 to 2008, the economy contracted by 7.8% in 2009. The economy slightly recovered in 2010 and 2011, with GDP growth rates of 1.2% and 0.6%, respectively. However, in 2012 the economy shrunk 2.7%, followed by another 1.1% economic contraction in 2013.
Last year, the economy grew by a modest 2.3%, after growing by 3.1% in 2014, according to the IMF. Slovenia’s economy is expected to expand by 2.3% this year and by another 1.8% in 2017.
Slovenia’s government budget deficit in in 2015 amounted to €1.03 billion or 2.7% of GDP, sharply down from its deficit of 5% of GDP in 2015, and 15% in 2014, according to Statistical Office of the Republic of Slovenia, and well within the EU’s limit of 3%.
In 2016, the government budget deficit is expected to 2.2% of GDP, and by 2018, to 0.7% of GDP. Gross public debt is expected to fall to 80.2% of GDP this year, from 83.2% in 2015 and 81% in 2014, according to the European Commission.
Because of these better deficit and debt metrics:
- Moody’s recently upgraded its outlook on Slovenia’s credit ratings from stable to positive.
- Fitch upgraded the country’s credit rating in September 2016 from BBB+ to A.
- Standard & Poor’s upgraded its credit rating in June 2016 from A- to A.
Unemployment stood at 10.7% in September 2016, unchanged from the previous month but an improvement from 11.5% in a year earlier, according to Statistical Office of the Republic of Slovenia. Unemployment increased to an average of 8.9% from 2010 to 2015, from just 6% from 2000 to 2009, according to the IMF.
Inflation stood at 0.6% in October 2016, in contrast with a decline in consumer prices of 0.8% during the same period last year, according to Statistical Office of the Republic of Slovenia.
Slovenia, with a population of about 2 million people, joined the EU in 2004 and the euro in 2007.
- Slovenia’s housing market recovering, amidst surging demand - November 08, 2016
- Unhappy Ljubljana, Slovenia - April 10, 2014