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