Eight Reasons For Bulgarian Property Depreciation
Bulgarian property prices posted remarkable growth in recent years, propelled by a number of factors. The main driver of the boom has been the country’s accession to the European Union (EU). This drew a considerable amount of speculative capital, according to a recent analysis in profit.bg.
Prices of Bulgarian real estate were significantly lower than the EU average and investors predicted, accurately, that Bulgaria’s development would emulate the examples of Poland, Czech Republic, Lithuania, Latvia and Estonia.
The last three years saw a sharp rise of prices - in 2007 alone prices increased by 34 per cent, propelling the country to the top of world rankings in terms of price growth. However, the market cannot move inexorably in one direction. Usually a downturn follows a steep upswing. Profit.bg analysis cited eight reasons for а forthcoming drop in prices.
1. Speculative investors leaving
The global credit crunch on mortgage markets has made investors more circumspect. Many of them downscaled their businesses and withdrew from emerging markets like Bulgaria. This squeezed investment volumes, generally the foundation for a price increase. In their attempts to avoid or reduce financial losses, many entrepreneurs opted for leaving the Bulgarian market.
The real estate market expects a significant delivery of new units during the next couple of years. Their construction started several years ago when this sector enjoyed a robust demand and many developments were sold off-plan. However, the new stock that will be released will increase supply, which might drive prices down.
3. Construction sector overheating
The high profit margin in the construction sector, which exceeded 100 per cent, attracted many investors in recent years. The number of developers, both local and foreign, grew and spurred competition, reducing profit margins in the process.
Even though the latest data on Bulgaria's business climate showed that most entrepreneurs in the construction sector remained positive, with more than two thirds saying current levels were here to stay, the sector was in the top three most hazardous industries in Bulgaria in 2007, according to the latest report from risk management company Coface.
When not accompanied by equal or higher earnings growth, high inflation diminishes real household income and this reverberates on real estate purchases, which lessens demand. And low demand could induce a price decrease. Inflation in Bulgaria was 12.5 per cent in 2007.
5. Rising interest rates on loans
Loans are very important for financing a property purchase, with more than half of Bulgarians seeking to buy property planning to use mortgage loans to finance the purchase. Consequently, the rise of lending interest rates increase monthly mortgage instalments and impacts the affordability of a house unit, which could undermine attractiveness and squeeze demand volumes, driving prices down.
6. Tightened lending terms
Difficult access to bank loans will directly impact the number of property purchases, which might make entrepreneurs reconsider prices and decrease their outputs. Worried by the credit growth rate, which exceeded 60 per cent last year despite a series of measures meant to keep it in check, Bulgarian National Bank plans to impose new restrictions this year.
7. Decrease of rental yields
Currently, the return on rentals averages 5.7 per cent, as compared to 10 per cent a year or two ago.
8. Demographic slump
The negative birth rate, the high emigration rate and an ageing population are serious factors undermining demand.