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Prof. Krasimir Petrov in an interview for the morning block “Buongiorno, Bulgaria” on Radio “Focus”
What is happening to the real estate market in our country? Why “Bulgarian” and “property” – are these two words strongly related? Will there be a cooling of the housing market and when will the infamous housing bubble burst? My host is Prof. Krasimir Petrov – Doctor of Economics from the Ohio State University of Economics. Good morning.
Good morning. And thanks for the invitation.
And we thank you for being our guest. Prof. Petrov, let’s start from there: what is happening to the economy of our country?
The economy of our country is in serious crisis. We have been in crisis since COVID-19, when the economy was closed, there was simply no economy, or it was slipping, or let’s say 1/3 of the economy was closed. And we have tried to compensate for this by simply printing money, that is, the government takes loans, no matter from within or without, loans that are not backed by real assets, that is, inflationary loans. And as a result of that, we are suffering from high inflation today, now or for the past year or year and a half. I stress that this is not a purely Bulgarian decision, it was taken by all of Europe, the USA, Great Britain. In general, all the large and small economies of the world have reacted in this way. We too reacted in this way and now we want inflationary potpourri.
And how has this inflationary boom affected the housing market?
This inflationary potpourri was like fuel for fire. From 2016 to 2017 we have a resumption of the real estate bubble. I would like to clarify in context that from 2004 to 2008 we had an extremely serious bubble. So the prices went up by about three times. A bubble burst from 2008 to 2013. Prices have fallen by 30-40-50, and in many places as much as 70%, and with KTB’s failure somewhere around 2013-2014, the bottom of the previous bubble burst, we have revived a new bubble, let’s say from 2015-2016.
That is, 2013-2016-2017 was the period of stabilization and boom of the housing market, after which it has already turned into a manic bubble, and now, in the last 2-3 years with inflationary money we have entered the last phase bubble frenzy, where people just went crazy, I went crazy, they took all the money from under the mattresses, from the banks, separately people got stuck with several tens of billions of leverage additional loans, we are talking about mortgage loans, just to buy property, as their money is depreciating.
It is as if the Bulgarian likes to buy property. What do you think?
The Bulgarian certainly likes to buy real estate. But I have to clarify right away, because I have heard this thing for dozens, not to say hundreds of people, that it is part of our culture, but I have lived in 10 different countries in the last 20 years, visited 20 more and more countries, believe me, every culture, every civilization, I can give you an example of Thailand, where the dream is to buy a property, and even then, when I was teaching there in 2013-2014, people were going crazy.
It has also been for the past 3-4 years that I have been teaching. After the same, it was in Dubai, where I lived and taught for a year and a half. Of course, this is also true in Russia and America. In general, the story of the Bulgarian and the snake is exaggerated. Yes, it is, but this applies to every culture, every civilization, every mentality. It is human nature to buy property because it is part of human nature for people to seek some form of security. And people perceive, obviously also in Africa, and obviously also in South and North America, property as safety, reliability. So this is not typical Bulgarian, but typical human.
Prof. Petrov, let’s go back to the housing bubble that you said has turned into a mental bubble, right?
In mania.
In geek, I’m sorry.
I mean, we’re in the obsession phase, and it’s already becoming a frenzied obsession.
Do you think this geek bubble will burst soon?
Yes, it was until the summer, now for the third quarter we have a lot of data and indicators, it seems that this bubble is already exhaling and we are more or less in the first early stage of the bursting bubble. This means the following: for the third quarter, compared to the previous third quarter, we have a drop in transactions between 20 and 25%, it depends if we are looking at Sofia or the province.
That is, the decline is not related to the summer, as we are comparing this summer with the previous summer. In addition, the other day Polya Hristova, a well-known broker, came up with very good statistics that the number of newly established mortgage loans for the purchase of homes, not for refinancing and other purposes, also decreased by a similar 20. %, and in the meantime we have many indicators that brokers generally do not receive phone calls, there is no demand, there is no great ringing of phones, and in general we see all the media, including the national ones, the big ones: BNT , bTV, Nova, etc …
I would also add the national chain “Focus”.
And the national chain “Focus”, I make clear, is preparing people that it will be a hard, hungry, cold and, in all likelihood, extremely expensive winter, that is, the winter will be particularly inflationary.
That is, people now prefer to step back and simply wait to see how events unfold before making this colossal purchase. The argument about people with money, that people have a lot of money, is generally expressed in the main paragraph. Who are these people who have 100-200,000 or more BGN in their account, who didn’t buy 2, 4, 6 years ago?
That is, people who had and have money, bought a long time ago. Now mainly buyers are people who have no money, that is, people who take loans. Other people who buy with so called “cash deals” which is one of the biggest myths and it is good to clarify that 50% of the deals are cash.
Actually, this is true, but the transaction is in cash, because the person sold the apartment to Veliko Tarnovo and goes with the cash to buy the apartment in Sofia, sold the inherited land, etc., received the money and transform a property from one place to another. But in its deepest essence, this is not a cash transaction, since the person who bought the apartment in Tarnovo, respectively, the buyer took the mortgage, the person from Tarnovo goes to buy the apartment in Sofia in cash, Sofia’s person takes the money and they leave, buys in Blagoevgrad and Blagoevgrad’s person buys.
That is, you get a chain of transactions, in which we change apartments, and these are not new, fresh cash, which, say, came from Great Britain, Dubai, Germany or France. So actually the market, as some brokers have said, is cooling down and as other brokers have said, the real estate market is calming down right now, in my opinion, the housing bubble is deflating. When each bubble bursts, the first stage is price containment.
So we’re in that phase right now: price holding, right?
That’s right, at this stage. But this phase is present in every bursting of the real estate bubble, always present. This is the first initial stage where buyers are pulling out and sellers within two, three, six months are holding and tightening.
But sooner or later sellers appear, some – by death, others – by divorce, third – by change of city, fourth – because they have been since dawn, that is, they cannot repay the mortgage, and fifth, the most motivated sellers, in reality it is these sellers, who are speculators, bought seven or eight years ago at half price, that is, at 100,000, the price has reached 200,000, he sees that he can take 190 or 180 thousand and make a profit.
Profit making in this case is speculative profit because he bought it to sell it in three or six years. He has a huge profit and is motivated to sell at some point in the fastest way as prices are starting to breathe and profit is the biggest reason why prices go down. That is. bought for 100,000. If he gets 200 or 190,000, he doesn’t care. For him, it is important to make a quick profit and turn his money into the next scam.
Prof. Petrov, what will happen, however, when we adopt the euro? Will the Bulgarians be in an advantageous position?
In general, we are not, the euro is by no means a good, nice, stable and solid currency. The euro has no memory of the old German mark, which was the basis of the euro. The euro seems to be a mixture of the Greek drachma and the Italian lira, that is, the monetary policy of the ECB, highly inflationary, serves Greece, Italy, Spain, even France with over-indebtedness and unfortunately does not serve and does not have the discipline of Germany. .
For this reason, from an economic and financial point of view, it is inappropriate to accept the euro, since the euro is an extremely weak currency with an extremely inflationary policy. Let’s stress though: I guess everyone knows that the ECB was the last bank in the world to raise interest rates to zero a few months ago. And the other bank that holds around zero is Japan. All the other banks have raised 2, 3, 4 and more times, some have already raised over 2%. The ECB does not and realistically cannot raise interest rates.
That is. yes, they raised 0.75% last week, but the ECB is the last bank with the lowest interest rates after Japan, as a serious rate hike would actually bring down eg. it will lead Greece and Italy to bankruptcy. That is. The ECB is trapped between a rock and a hard place. The hammer is, of course, inflation, and the anvil is the failure of the weak Mediterranean countries. So the ECB is at an infinite disadvantage. Besides, he has no useful move – let’s say in chess: he is in zugzwang. Whatever it does, the position is losing and will lose. And for us to join the euro now is particularly irrational. But our people say we have to do this for political reasons, which is another topic that is harder for me to comment on, but economically it is absolutely unprofitable and unfair, and it is not healthy for our Bulgarian economy, which has its own. same problems.
That is. this bubble about to burst – the real estate bubble …
Yes, or it bursts, now, at the moment, it is bursting.
Or it bursts, yes, it could end up in a different situation already with the adoption of the euro, where perhaps everything will double in price. OR?
That’s right, maybe everything will go up in price … not to say double, but 30-50% could blow up the prices of everything else, but not of real estate. This is also particularly characteristic: there is general consumer inflation, but the real estate sector has already marked, eg. they’ve already priced that item, they’ve embraced that item, and when consumer prices rise, the property will not rise in nominal terms and that will devalue the property in real terms, measured in bread, cheese, milk or the purchase value of an apartment. This is how the value of an apartment is actually measured, in its purchase value. If you sell the house, how much bread can you buy from it.
