Growing too fast? The stability of the Romanian residential construction market

As the housing market in Romania is seeing a rapid expansion, this rings the bell to some experts: there is a growing concern that the 2008 turmoil might repeat itself. Can the 2008 crunch be back in the Romanian housing market? This article is looking at the probabilities of this to happen.

Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania

High-end residential project, Herastrau, North of Bucharest, Romania. Source: http://www.ascendproperty.ro

For almost a year now, concerns have risen regarding the Romanian residential market. Any instabilities in this field would have major implications across the whole construction sector, since residential construction accounted for approximately 1/3 of the yearly construction output of Romania in 2016.

Opinions emerged regarding the similarities between the 2007 and 2017 market dynamics, and reports by the National Bank (BNR), National Statistics Institute (NSI) and real estate agencies indicated unusually high growth rates of residential prices.

So, how likely is a correction event?

To answer this, we must look at the idiosyncrasies of the Romanian construction market, the similarities and differences between the collapse in 2008 and the current status.

The residential construction market in Romania is a mix between large projects, run by speculative developers, small projects contracted to construction companies and projects built by the owner.

Romanians are generally home owners, with 96% living in a house they own. They are also very fond of building homes themselves, mainly in the rural areas. This trend of self-development, mainly in the rural areas, is relatively untouched by macro-economic phenomena. Any disposable income is invested into construction materials that are used to build up or expand the home, leading to very low construction costs.

The main source of instability, however, is that of speculative urban (or suburban) development. With profit margins boosted by the real estate price increases and high demand, investments into residential construction are attractive. This has been evident in the years leading to 2008, as the number of homes in multi-unit buildings completed in 2008 was nearly three times that of the previous year, and the number of permits for this building type doubled yearly between 2006 and 2008.

The current status of the market is optimistic. Two-digit growth rates are estimated for 2016 and 2017, with EECFA’s forecast being positive until at least 2019 (the latest EECFA Romania Forecast Report can be purchased here).

Those who express concerns regarding these growth rates look at the similar results of 2006-2008 and expect another collapse of the market to take place. Other concerns are that much of recent growth has been backed by government subsidies. Under the ’Prima Casa’ Program, the mortgage market has considerably grown since 2010. However, there are plans to reduce the program each year, with the budget for 2018 down to RON 2bln (from 2.5bln in 2017). This, combined with increased credit interest rates, should lead to a reduction in demand for residential construction. And some worry that since many developers build homes tailored to the requirements of the program, there will be an oversupply once the program ends and/or loans become increasingly expensive.

In our opinion, the odds of this happening are slim. We back this hypothesis with an analysis of several key market indicators.

Firstly, increases in income due to economic growth should cover, if not surpass, the increase of mortgage loan interest rates. Real wages are predicted to increase with more than 5% per year until 2021 (source: The National Forecasting Agency).

Secondly, interest rates have been at a very low rate due to an oversupply of money in the banking system. Increased caution, the development of a saving philosophy, decreasing confidence in the state’s abilities to adequately handle retirement and social security funds has led to a decrease in frivolous spending. Comparing the increases in income and spending, one can notice that they are fundamentally different than those of 2008 (Figure 1).

Figure 1. Money left into the household on average after paying for all expenses at the end of the month (2017 estimated based on Q1-Q3). Source: NSI.

At the same time, deposits by the population have steadily increased, and 2017 marked the highest value in the last 10 years, with more than RON 106bln.

Figure 2. Average value of monetary deposits by the populations, Billion RON. Source: BNR.

What does this mean for the residential construction market?

It means that despite loans being more expensive, and subsidies being reduced, the population has acquired significant savings to compensate for this; even if it were not so, increases in wages provide the basis for increased demand for new homes.

How is this different from the 2008 pre-crisis market?

In 2007 and 2008 residential prices had greatly exceeded income growth rates. While data from the period remains uncertain (as the National Statistics Institute only started looking at the market after the crash), estimates from the market place the average value for homes in 2017 under that of 2007, while net wages are nearly double.

In conclusion, we consider the risk of a major correction in 2018-2019 to be low. The residential construction market is significantly more stable than it was before the 2008 event. Furthermore, the National Bank and the Government have a stronger influence on the market and have more means to intervene in case of an overheating.

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