The CEE residential markets in fall 2009 – a comparative note

Recent investigation on the state of the residential markets in Central European cities revealed many similarities, but also several differences, how the downturn affected each respective market. Though there is certainly no doubt that the credit crunch have had a major impact on all of them.

Across Central Europe the number of home sales drastically decreased throughout the last year and remained on a low level throughout the first three quarters of 2009. One of the main causes for this decline in transactions may be found in the banking sector, chiefly concerning the banks’ liquidity problems and their lately ultraconservative mortgage lending policies towards homebuyers in these recession days. Another reason unquestionably laid in the maladjustment of the housing offer to local households’ financial possibilities – the question of affordability, which is most probably best expressed in case of the residential market of Bucharest.

As a consequence on the missing cash-flow, developers reacted on the pricing side: firstly through minor discounts, purchase incentives and other special offers, and, since this did not really work out well, finally through actual price drops. Though the price development did not follow one certain timetable throughout the region, one can certainly state that housing prices overall declined, while many markets in the region still show a decreasing price trend. Prague’s and Budapest’s developers seem to have been among the most stubborn ones in trying to sustain pre-crisis price levels. In anticipation of price falls even potential buyers – i.e. those households which would be creditable – held back their purchase decisions, further fuelling the vicious circle.

The lack of demand resulted in an accumulation of unsold housing stock, in various stages of development, also including many finished dwellings which was quite a novelty for the CEE residential market. On top of that, there were many homes returning to the offer due to sales cancellations, even if this included the loss of the first installment(s). For instance, at its peak in the end of 2008, Warsaw recorded some 17,000 unsold housing units in the accumulated offer. Despite the fact that in this way the market offer rose, developers on the other hand limited further competition by virtually halting any new development. While in some cases this might have been a self-contained and rational decision, in other cases many developers simply could not obtain the necessary funds to start new investments.

After the boom period we are in the middle of experiencing the subsequent bust cycle. And, it is very likely that this bust interval will still remain for quite a while. It will simply take time until the accumulated unsold stock will be substantially diminished. Developers are in need to notice transactions, to see the cash flow again. But even then, the next construction boom will need to wait as long as banks start lending construction loans on a greater scale again. In the meantime, the better-off residential developers will prepare new investments and concentrate their attention to obtain land banks, while others will continue in their struggle for survival on the market. In this respect, the situation differs not only from developer to developer but also from city to city. For example: while developers in Warsaw obtained building permits for about 7,000 dwellings in H1, 2009, it was 4,600 in Budapest and 4,500 in Prague, and less than 2,000 in Sofia.

But admittedly there are differences both in the size of the cities as in the size of their respective markets. Anticipating the BalREc conference in Sofia, Bulgaria, on 5-6th November (http://www.balrec.eu/en/1/Home), it will be interesting to discuss the reason for the still low supply of new housing in Sofia compared to other regional markets – and, with only 637 permitted dwellings in Q2, 2009, which makes the worst quarterly result in issued building permits since at least 2005, it is expected to remain low. Another interesting point will be the development of prices, which are estimated by official figures to have dropped countrywide by almost 30% in the first three quarters of 2009. In Sofia the particular problem seems to be lying in the higher-priced market segments – again the maladjustment of the offer to local demand.

With respect to the residential markets of Warsaw, Prague, Budapest and Bucharest, we invite you to have a look at the latest editions of the City Reports prepared by Jones Lang LaSalle in co-operation with REAS (residential market), which are describing the market situation and trends as of Q3, 2009.

Report available on REAS website: http://www.residentialadvisors.eu/publications.html

Maximilian Mendel
Senior Consultant

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