Bank of Slovenia: Real estate prices are not too high

Bank of Slovenia: Real estate prices are not too high. The Bank of Slovenia in its report on Financial Stability, which was just issued, assessed the real estate market and announced the possible risks that may arise from market.

Real estate prices have been rising in recent years,recent analyzes showing a moderation, but only in some areas and segments. According to the Surveying and Mapping Authority of the Republic of Slovenia (GURS), for example, real estate prices in Koper have increased by 42 percent since 2015 and are still rising, while in Ljubljana they recorded a 25 percent growth in this period, which is now calming down. The Bank of Slovenia nevertheless states that residential real estate is not overstated, but has come closer to equilibrium levels. At the same time, they note that demand is falling, buyers are more reticent, and property prices are rising faster than incomes.

Real estate prices and their overestimation

Real estate appraisal indicators in the first half of 2019 did not yet indicate an overestimation of residential real estate, but a movement close to the equilibrium level. In the second quarter of 2019, residential real estate prices were nominally at a similar level as in 2008, but in real terms remained 11.5 percent below the price peak.

The near-equilibrium price movement shows us the price-to-income ratio and the price-to-rent ratio.

Also, comparing the number of annual net salaries required to buy a home with the long-term average does not indicate an overestimation, since the ratio in the second quarter of 2019 was at the level of the long-term average. The rise in residential property prices in Slovenia is increasingly approaching the euro area average. With the exception of Italy, price growth was also present in all euro area countries in the first half of 2019, but with a deteriorating economic situation, a gradual decline in rates may be observed. Although there are considerable differences in prices between countries, in the first half of 2019 the year-on-year fall in prices in Ireland and Romania was most pronounced in Slovenia, which remained above the euro area average by 1.6 percentage points in the second quarter of 2019.

The prices of second-hand flats also increased in major Slovenian cities in the first half of 2019, with the exception of Ljubljana, where prices have stagnated in recent years after high growth. In the future we can expect a further rise in real estate prices at more moderate rates. The potential for a stronger turn in the economy and the labor market is not expected to see a sharp decline in real estate prices.

Rents Rise More Than Real Estate Rates

The slowdown in real estate market prices is also expected to result in a slowdown in rental growth, which can increase the risk for investors. In addition to real estate prices, rents have been on the rise since 2015, which has further encouraged investors to buy real estate for rent. With the growth of tourism and the increasing possibility of renting real estate through online portals, the rental market has also become an opportunity for additional income, especially in Ljubljana, where the average monthly rent of a two-bedroom apartment has increased from 690 in 2014 to 920 euros in 2018.

Price and rent dropped for the first time in the first half of 2019, which means that property prices increased less than rents. A slower response of rents to the cooling of the economy is expected, also due to longer-term lease agreements, but in the future, similar to prices, we can expect a moderation.

Expected adjustments to the cooling of the economy can be expected with tourism leases, as these are shorter and more adaptable to market conditions. The slowdown in rental growth may increase the risk for investors who have purchased real estate loans and loans, and at the same time, in anticipation of continued growth and the related ability to repay the loan.

Demand is declining

Demand for residential real estate is gradually slowing down, and the number of homes sold is gradually declining, while the value of transactions remains high. The number of homes sold peaked in 2017 (14,865), declining in 2018 (13,154) and declining in the first half of 2019 (6,748).

For used real estate, although the number of sales remains relatively high, the number of new real estate sales has fallen sharply due to the lack of a market. The sale of new apartments will depend on the realistically set selling prices by investors. If the selling prices of investors are too high, either because of unrealistic expectations or because of high investment costs, there may be more unsold new homes on the market, just like in the last crisis.

Consumers are more pessimistic about the future economic situation in Slovenia and their financial situation as the economic situation cools, which can increase uncertainty and lower demand for real estate. Even after a survey of banks asking for housing loan demand, demand in 2019 declined slightly.

Demand for real estate is also slowing down due to their decreasing availability, as property prices not always grow faster than disposable income. Despite the growth, housing supply has not yet adjusted to demand, and the risk remains with the realization of forecast projects and their financial construction.

Cooling down the economy and lower purchasing power

Cooling down the economy will also affect the real estate market. Economic growth in Slovenia is projected to be lower in the coming years than it has been in the past three years, which may also affect the labor market. With the deterioration of the labor market, the solvency of buyers would decrease, leaving the realization of new residential real estate sales uncertain. However, uncertainty in the economy may also be reflected in creditworthy demand.

Credit standards for home loans

The proportion of deviations from the Bank of Slovenia’s recommendations has been high in recent years, increasing the likelihood of households’ insolvency in the event of a deterioration in the labor market. The deterioration of the economic situation could increase the burden of repayment of loans, which is why the Bank of Slovenia turned the macroprudential recommendation into a binding macroprudential instrument.

It should be reminded that the Bank of Slovenia adopted a decision on November 1, which tightens the conditions for lending to households, which according to the banks is already known in the volume of home loans, which hinders the accessibility of real estate.
Bank of Slovenia: Real estate prices are not too high.

Source: https://www.zurnal24.si/pod-streho/banka-slovenije-stanovanjske-nepremicnine-niso-precenjene-338960