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Analysis of real estate prices in East Europe (Sir Og, don't buy!)
I know most people here are worried about US real estate markets, but those of us who gravitate to South-East Europe, here's an interesting analysis:
Some time ago I have conducted a scientific investigation of my own along those lines. It showed me that prices here (Croatia) are very high compared to most regions of the US (as I thought) but that there are even pricier places out there.
I would like to buy a place and given that I don't earn much a real estate bust would help me out
What I can't figure out is how likely it is. The Bulgarian professor I quoted is pretty sure that there's a bust pending, but I am not so convinced.
On the one hand, people are rational and should stop buying real estate if they get a lower return from it than from a bank deposit.
On the other hand, East Europeans are mostly irrational and have a relationship with real-estate which is rather emotional and perhaps even bordering on superstitious.
"We're in EU now, prices can only rise"
Anyway, given that we in Croatia have had the telltale signs of an upcoming real estate bubble burst for years now and it hasn't materialized yet, and given that the economy is rising at a healthy 4,5% annually, and given that we're going into EU soon, I estimate that (contrary to economic logic) we're going to remain in this state indefinitely.
I'm hoping that tightening credit market in the world can have an impact (most mortgages here are on variable interest) but I'm not holding my breath.
Real estate has two fundamental indicators that serve the serious analyst as guideposts: (1) the rent-to-price ratio and (2) the price-to-income ratio. The first indicator, rent-to-price, divides annual rent from the property to its purchase price, thus the yield or current return of the investment. U.S. history for over hundred years suggests a normal yield of around 10-12%; yields of 15-20% suggest that the property is undervalued, while yields of 6-8% or lower suggest overvaluation and bubble territory. Over the last 3-4 years, yields in Bulgaria hover in the 3-4% range, suggesting a strong bubble, with properties overvalued about 3-4 times the “normal”.
The second indicator, price-to-income ratio, tells how many years of pre-tax annual earnings are necessary for a household to purchase a house. The historical rule of thumb is that one annual income indicates undervalued properties, two annual incomes – normal valuation, and three annual incomes – overvaluation and bubble territory. Currently, this ratio for most regional markets in the economy is around 7-9, which is once again indicative that real estate is overvalued roughly 3-4 times.
Thus, both indicators confirm that there is a real estate bubble across the country, although no analyst in Bulgaria would actually perform this analysis. Interestingly, when analysts are confronted with the fact that real estate earns less than a bank deposit, they immediately respond that rising prices more than compensate for the low yield[4]. So much for the rock-solid fundamentals of the real estate sector.
The second indicator, price-to-income ratio, tells how many years of pre-tax annual earnings are necessary for a household to purchase a house. The historical rule of thumb is that one annual income indicates undervalued properties, two annual incomes – normal valuation, and three annual incomes – overvaluation and bubble territory. Currently, this ratio for most regional markets in the economy is around 7-9, which is once again indicative that real estate is overvalued roughly 3-4 times.
Thus, both indicators confirm that there is a real estate bubble across the country, although no analyst in Bulgaria would actually perform this analysis. Interestingly, when analysts are confronted with the fact that real estate earns less than a bank deposit, they immediately respond that rising prices more than compensate for the low yield[4]. So much for the rock-solid fundamentals of the real estate sector.
Some time ago I have conducted a scientific investigation of my own along those lines. It showed me that prices here (Croatia) are very high compared to most regions of the US (as I thought) but that there are even pricier places out there.
I would like to buy a place and given that I don't earn much a real estate bust would help me out
What I can't figure out is how likely it is. The Bulgarian professor I quoted is pretty sure that there's a bust pending, but I am not so convinced.
On the one hand, people are rational and should stop buying real estate if they get a lower return from it than from a bank deposit.
On the other hand, East Europeans are mostly irrational and have a relationship with real-estate which is rather emotional and perhaps even bordering on superstitious.
"We're in EU now, prices can only rise"
Anyway, given that we in Croatia have had the telltale signs of an upcoming real estate bubble burst for years now and it hasn't materialized yet, and given that the economy is rising at a healthy 4,5% annually, and given that we're going into EU soon, I estimate that (contrary to economic logic) we're going to remain in this state indefinitely.
I'm hoping that tightening credit market in the world can have an impact (most mortgages here are on variable interest) but I'm not holding my breath.
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