Slovakia’s housing market slows sharply

The great Slovak property boom seems to be stalling. Nationally, residential property prices dropped during the 3rd quarter by 0.44%, to SKK46,453 (€1,532) per sq. m. In the Bratislava region, where the capital is located, average house prices fell 1.4% during the quarter.

Quarterly figures can be misleading, but the pace of price rises is certainly slowing, perhaps as a result of somewhat higher interest rates and higher inflation. House prices rose 20% to end-Q3 2008 from a year earlier (14.2% in real terms), down from an amazing 36.5% price increase in the year to end-Q1 2008.

Residential prices rose fastest in the region of Presov (53.3% y-o-y change to end-Q3 2008). The lowest increases took place in Banska, which has the country’s lowest population density, with house price increases of 15% over the same period.

The wider region of Bratislava has the country’s most expensive residential properties, with an average price of SKK59,970 per sq. m (€1,978). The region of Nitra has Slovakia’s cheapest properties, at SKK23,966 (€791) per sq. m.

Record-breaking economic growth, low deficit

House price rises are usually driven by strong economic growth, and by low interest rates. This has been the case in Slovakia.

Slovakia’s real GDP growth reached an impressive 10.4% in 2007, following 8.2% for 2006, 5% for 2005, and 5.5% for 2004. In 2008, real GDP is expected to grow by 7.4%. The Slovak Republic is now the fastest growing economy within the EU and OECD.

The budget deficit has been reduced from 10% of GDP in 2000 to just 1.5% of GDP in 2003. It rose to 3.8% in 2006 but declined to 2.2% in 2007.

With inflation and budget deficit low, Slovakia was given the approval to adopt the euro on January 1, 2009, ahead of its neighbors, Czech Republic, Hungary, and Poland.

Inflation in 2007 was 2.8%, following 4.4% in 2006 and 2.8% in 2005, having dropped from 12% in 2000. However, due to rising energy and commodity prices, annual inflation accelerated to 5.4% in September 2008, the highest level since December 2004, according to the Slovak Statistics Office.

Nevertheless the National Bank of Slovakia cut its key policy rate by 50 basis points to 3.25% in November 2008, bringing it in line with the European Central Bank, as Slovakia prepares to switch to the euro at the beginning of 2009.

With the lower cost of borrowing, some analysts are optimistic that house prices will again accelerate in the coming year.

However we are somewhat less optimistic. Slovak gross rental yields have dropped dramatically in the past few years. On the other hand, Slovakia’s strong economic growth and sound fundamentals are likely to restrain any price declines.

Small flats led the great housing boom

From 2002 to 2007, residential property prices rose by an impressive 109% in Slovakia (63% in real terms).

• In 2007, residential prices rose 32.5% (28% in real terms).
• In 2006, prices rose 17.5% (12.9% in real terms).

Euro-based investors’ gains were amplified by the currency’s appreciation from 42 Koruna = €1 in 2003 to 30.4 Koruna = €1 today.

In terms of property type, flats (apartments) have led price growth.

• Prices of flats rose 20% to SKK48,216 (€1,590) per sq. m. during the year to end-Q3 2008.
• Prices of villas rose 12.5% to SKK59,464 (€1,961) per sq. m.
• Prices of single-detached house were SKK37,089 (€1,223) per sq. m., up 8% from a year earlier.

Prices of smaller flats have tended to rise faster than bigger-sized units. The average price of one-bedroom (BR) flats rose 28.4% to end Q3 2008 from a year earlier, while flats with five bedrooms or more registered a lower price growth of 17.8%. One bedroom flats now command SKK55,923 (€1,845) per sq. m., somewhat higher than the SKK50,365 (€1,661) per sq. m., for two bedroom flats.

Rapid economic growth has been the main fuel for the house price boom.

Mortgage market and interest rates

Outstanding mortgages amounted to 11% of GDP in 2007, one of the lowest mortgage-debt-to-GDP ratios in the EU. But the Slovak mortgage market, albeit small, is rapidly expanding. The volume of housing loans to households increased from SKK44 (€1.45) billion in 2002 to SKK204 (€6.73) billion at end-2007. By end of August 2008 total outstanding housing loans were 29.2% up from a year earlier.

The interest rate on house purchase loans was reduced to 6.38% in September 2008, though still higher from 6.04% a year earlier.

Slovakia’s central bank, the National Bank of Slovakia, cut the policy rate by 50 basis points to 3.25% in November 2008. The central bank’s decision brought the country’s key rate in line with that of the European Central Bank, as Slovakia prepares to switch to the euro at the beginning of 2009.

Small private rental market

During the communist regime, all flats were state-owned. In 1990, the mass privatization of flats began, and in 1993 social housing units were sold to tenants at bargain prices. Three-bedroom flats were sold at around SKK15,000 (€495) to SKK50,000 (€1,649) - less than 5% of their real market value.

Owner-occupancy rose dramatically from 49.7% in 1990, to 85% by 2004, while the share of co-operative housing had fallen to 7%, and the share of public rental housing to 5%.

The private rental sector is now practically non-existent. Only 0.1% of Slovakia’s housing stock is held by private landlords, mainly concentrated in Bratislava.

In 2005 the government decreed to abolition of rent control, effective July 1, 2007. However, in April 2008, a new decree regulating rents was adopted, postponing the total deregulation of rent for restituted properties till the end of 2008.

Robust local demand, inadequate supply

Supply, while rising, is insufficient to meet the enormous demand for quality housing in Slovakia. In 2005, Slovakia had 309 dwellings per 1,000 inhabitants, well below the EU 15 average of 457 dwellings per 1,000 inhabitants. A large portion of the housing stock needs replacing, especially the poor standard “panelaks” built during the communist regime.

Estimates suggest that around 45,000 to 50,000 new apartments will be needed annually during the coming years. In 2007, about 16,473 new dwellings were completed, one-third in Bratislava. The Slovak Ministry of Construction and Regional Development forecasts that there will be 20,000 dwellings completed annually by 2010.

“This is a very interesting situation,” says Andras Patkai of Ceinvest.sk. “There was a 10-year period after the fall of communism when nothing was built. The gap (in construction) is what is forcing the pace. There is tremendous local demand for new built units,” he adds.

“We see increasing local demand for the West of Bratislava,” says Patkai. “In the Eastern parts there are many ugly Communist-era blocks, which will be the living place for the working class and for new arrivals from the rest of Slovakia.”

Residential demand is driven primarily by local buyers, whose purchases have surged since mortgages were introduced several years ago. The total dwelling stock was around 1.7 million in 2002, according to UN Economic Commission for Europe. Around 850,000 of these were flats, while 870,000 were family houses.

Europe’s most successful transition economy

Slovakia is one of the most successful transition countries in Eastern Europe. Established after the nation seceded amiably from Czech Republic in 1993 (the two countries were formerly known as Czechoslovakia), its stable polity and liberal market economy belie its previous 41-year communist rule.

Slovakia experienced slow economic growth from 1994 to 1998, when reforms were initially stalled by an authoritarian regime. However since then, the economy has consistently improved, facilitating the country’s membership to the Organization for Economic Cooperation and Development (OECD) in 2000 and the European Union (EU) and North Atlantic Treaty Organization (NATO) in 2004.

In December 2007 Slovakia became a full member of the Schengen Zone, which allows passport-free travel across the 24-member European nations.