(1)(1)(1).jpg "Inflation and bubbles: the predicted boom in the housing market")
In recent months, the focus in the analysis of the economic situation has gradually shifted to price dynamics. There is a clear upward trend in major price indices – according to Eurostat, producer prices in the EU in July 2021 are 12.2% higher than in July 2020, consumer prices in the Eurozone in August are 3% above the value of the index a year earlier, with 15.4% appreciation of energy goods and services. The index measured in Germany grew by 3.9% on an annual basis in August, and in addition to the effect of energy prices, food prices rose by 4.6%. In Bulgaria, the consumer price index reached 3% in July compared to a year earlier, but it should be noted that in our country the pandemic only interrupted a clear trend that has already begun in mid-2018. to the negative effects of the parallel monetary policies of zero and negative interest rates, combined with quantitative easing and high budget deficits, for the continuation and expansion of which the pandemic offered a convenient excuse by most governments.
However, we must not forget that always in history, and in recent decades – more and more visibly – the monetary loosening has initially and to a much greater extent inflated a bubble in asset prices. Sometimes consumer prices react late, and often under the influence of other factors acting in the opposite direction – for example, technological innovation, structural changes in markets, globalization and liberalization – nominal prices even fall or remain for some time, “masking” the manifestation of inflation . In countries with a deep and liquid capital market, financial assets are rising in price; everywhere, and especially in economies with a backward capital market such as the Bulgarian credit expansion leads to a construction boom and higher prices of the largest property classes.
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The latest data on the dynamics of loans, house prices and new construction confirm this connection. In short, with and without a pandemic, mass housing has become more expensive in recent years, and investors are completing and planning to build more and more buildings. All the signs of swelling of the so-called. “Investment bubble” are already visible and confirmed by the available statistical indicators. Here’s what we know at the moment:
- According to the housing price index measured by the NSI, housing in the first quarter of 2021 is 45% more expensive than the average price level in 2015 and 7.5% compared to a year earlier; for Sofia the increase is by almost 66% and 12% respectively. However, the index has historically underestimated the market prices of the most sought-after properties, excluding “green” deals, which are increasingly concluded in new construction.
- Statistics from the Registry Agency show a significant increase in real estate transactions. In the second quarter of 2021, sales were 62% higher than in the same quarter of 2020, replacements were 71% higher, contractual mortgages were over 52%; for Sofia the increase is 53%, 83% and 43% respectively. Even excluding the effect of last year’s pandemic, a comparison with 2019 shows a significant increase – in sales the number increases by 17%, in exchanges by 15% and in mortgages by 11% for the country as a whole; for Sofia the increase in sales is 27%, in exchanges – 15%, and in contractual mortgages – 21%.
- Market signals logically reach investors. For the first half of 2021, building permits were issued for residential buildings with 35% more total built-up area from the same period in 2020 and 5% more than in the first half of 2019 – when new peaks of start-up construction were already observed. intentions; compared to 2017, the growth is 61%. For Sofia alone, the increase is 62% compared to the first half of last year, 20% compared to 2019 and 110% more than in 2017. In some areas the increase compared to 2017 is between 2 and 8 times, although mainly due to very low values in 2017
- The investment intentions are gradually becoming a real construction activity – the started constructions of residential buildings (measured through the total built-up area) increase by 25% for the first half of the year compared to the same period of 2020, by 7% compared to the extremely strong 2019 and by 55% compared to the newly started constructions in 2017 In Sofia – where 39% of the constructions of residential buildings started in the first half of the year – the increase compared to last year is by 51%, compared to the first half of 2019 is 25%, and compared to the same period of 2017 – by 83%. Also for the first half of the year about 63% more homes were put into operation compared to the same period of the pre-crisis 2019.
- As the increase in employment and the tangible nominal increase in wages after 2015-2016 are a factor for the increased demand for housing, the dynamics in recent years cannot be considered outside the monetary policy and its impact on credit conditions in Bulgaria. As of July, housing loans to households in the banking system were 15.1% higher than in the same month of 2020, with the growth rate accelerating in recent months. After the stagnation in the period between 2009 and 2016, the loan is steadily growing at falling interest rates – compared to July 2017 it is 61% more, in nominal terms this is an increase of BGN 5 billion; only for the last 12 months the increase is by BGN 1.7 billion. The average interest rates on housing loans in BGN reached 2.73% in July 2021.
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Where is the problem and why are we monitoring these indicators? On the one hand, the treatment of real estate and housing in particular as an investment asset separates their price from the fundamental factors of supply and demand. The immediate consequence is that housing is becoming more and more inaccessible for some households, despite the more favorable conditions for financing with a bank loan. Beyond this effect – and without belittling it – such an inflation of the price of assets carries a significant financial risk. Despite fears of entering a cycle of higher consumer prices and the loss of real purchase value of money globally, protection through the purchase of real assets still has its limits. Moreover, some of the purchases are not motivated and supported by accumulated savings, but are financed through debt, in anticipation of profit through future resale.
When expectations change and to an even greater extent – when the parameters of the monetary policy of large central banks change – the trend reverses and the consequences come as a domino for investors and creditors. However, the deeper consequences come as a result of the structural change in the Bulgarian economy, which invariably occurs with a change in relative prices and demand. In short – business agents are redirected quite rationally to activities that the market at a given time, and according to expectations for the near future, “rewards” the best. Increased investment interest in real estate and the subsequent inevitable construction leads to restructuring of the economy in response to these incentives – so businesses serving the real estate boom gradually attract more capital, people and economic resources in general, at the expense of the inevitable contraction of entrepreneurial efforts in other areas. industry and export-oriented activities.
Institute for Market Economics
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