Home buying and renting costs continue to rise

Home buying and renting costs continue to rise

Prices of new dwellings on the Romanian market increased by 3.1 percent in 2020 compared to the previous year, reaching an average of EUR 1,322/sqm. Romania ranks fourth among the 24 countries analysed in the Deloitte Property Index 2021 report, in increasing order of prices, after Bulgaria, Bosnia and Herzegovina, and Portugal. As for the affordability of housing, calculated based on the number of average gross annual salaries needed to purchase a new standard dwelling (70 sqm), Romania ranks in the middle of the list.

By Aurel Constantin

Paris leads the ranking for cities with the highest rent prices, with EUR 28.6/sqm/month

For the first time, Austria took a leading position in 2020 as the most expensive of all analysed countries, with an average price of EUR 4,457/sqm, followed by France with EUR 4,421/sqm. Average prices of over EUR 4,000/sqm were also recorded last year in Germany, the United Kingdom, and Israel. At the opposite end, with the lowest average transaction prices for new dwellings, are Bulgaria (EUR 578/sqm) and Bosnia and Herzegovina (EUR 881/sqm).

The highest price growth during 2020 was recorded in Hungary, where the average transaction price of new dwellings rose by 12.3 percent compared to the previous year, followed by the Netherlands and Germany (with 10.8 percent each). Overall, house prices rose last year in 21 out of the 24 countries analysed. Price declines were recorded in Norway, with a 4 percent decrease, Bosnia and Herzegovina (-1.54 percent), and Italy (-1.24 percent). Romania, with an annual increase of 3.1 percent in prices, ranks sixth in the ascending order.

“Despite the uncertainty surrounding the European economy in 2020, in most cases, the residential market experienced price growths. This is due to the fact that most countries reported unprecedented demand for new housing shortly after pandemic restrictions were lifted, and likely also due to the rising construction costs and higher accessibility of financing. For the second half of 2021, the majority of survey participants (73 percent) estimated that prices would continue to rise in a general inflationary climate,” said Alexandra Smedoiu, Partner at Deloitte Romania and Real Estate Industry Leader.

The 2021 Deloitte Property Index also analysed 61 European cities, with Paris topping the list for the most expensive housing, with an average price of EUR 12,917/sqm for a new dwelling, followed by Tel Aviv (EUR 10,332/ sqm), Munich (EUR 8,700/sqm), and London (EUR 7,916/sqm). Three Romanian cities were included in the ranking: Cluj-Napoca (EUR 1,800/sqm), Bucharest (EUR 1,440/sqm), and Timisoara (EUR 1,270/sqm).

Paris also leads the ranking for cities with the highest rent prices, with EUR 28.6/sqm/ month, followed by London (EUR 26.1) and Oslo (EUR 24.7).

To conduct a relevant comparison of the analysed markets, the study also calculates the affordability of housing based on the number of average annual gross salaries needed to purchase a new standard dwelling of 70 sqm. A Romanian needs seven annual salaries to make such a purchase, which represents an average affordability level. The hardestto-reach dwellings are in Serbia, where 15.2 gross average annual salaries are needed for a new home, while the most affordable are in Portugal, Belgium, and Ireland (3.1 average annual salaries).

In contrast, Romania has the most expensive mortgage loans, with an average interest rate of 5.3 percent per year. Portugal is at the opposite end, where interest rates fluctuate around 1 percent per year.

PRIVATE RENTAL SECTOR

The Private Rental Sector (PRS) is expected to grow in the CEE region, as construction costs and inflation are rising and overcrowding rates are higher compared to the rest of the European Union (EU), Colliers reveals in its report titled “The Private Rental Sector: Has it found a home in CEE?”, created in collaboration with Greenberg Traurig and Kinstellar. Romania has the highest overcrowding rate in the EU, and even though private ownership is very high, rising home prices and construction costs are making it harder for people to own bigger homes, leading to a notable growth of the private rental sector.

Housing ownership in Romania is at the highest level in the EU. According to Eurostat data, approximately 96 percent of people in the country own the property in which they live, but some estimates cited by the Development Ministry place the share of rented apartments at up to 20 percent of the total stock in big cities like Bucharest and Cluj-Napoca. There is a cultural bias against this choice as much as there is an economic reason. For a very long time now, mortgages have been more affordable than rents. In Bucharest, a monthly mortgage is on average 12 percent cheaper than monthly rent, a level comparable to Warsaw or Sofia. By comparison, rents in Prague, for example, are more than 40 percent cheaper than a mortgage.

The overcrowding rate in Romania, based on the availability of rooms per person and the average household size, was 45.8 percent in 2019, above Latvia’s (42.2 percent) and Bulgaria’s (41.1 percent). Data suggests that the majority of households in Central Europe are more overcrowded than the EU average, but the long-term European trend shows a gradual decline in overcrowding as CEE markets continue on a convergence path, according to Colliers consultants. The continuous increase in sales prices is another driver for the private rental sector, particularly as central banks have taken some steps to limit the expansion of mortgages in the CEE in recent years. This has been most apparent in the Czech Republic, with over 50,000 units of private rental sector stock, but Poland is just starting to catch up, with more than 10,000 units planned or in development, adding to a stock of 5,000 units.

“We have seen prices across CEE, including in Romania, rising quickly over the past 5 years, partly driven by a shortage of supply as well as the relative ease and low cost of debt. Moreover, people have a desire to invest in order to earn more money on their savings than they would by keeping them in the bank. All these have acted as vectors for rising prices and costs, a trend that will force many Romanians, over the long term, to head towards private renting,” said Gabriel Blanita,

Associate Director for Valuation & Advisory Services at Colliers Romania.

From a developer’s standpoint, in order for residential rent to make financial sense, projects need to be conceived, designed, and built specifically for the rental market. As a result, a great deal of time and planning goes into these projects, particularly in terms of the unit mix and the services or amenities relevant to the location and target customer group.

“The private rental sector also requires significant attention to tenant services. Implementing a professional platform where tenants can speak to someone, register issues, and get timely feedback or resolutions is something that many players have already adopted or are heading towards. Advances in modern technologies (PropTech) are making this factor increasingly efficient and easy to manage,” Blanita adds.

Yields in the private rental sector depend on the location and vary between 3.5-4 percent in the Czech Republic and 5-5.5 percent in Poland. The best estimates place the average yield level for the Bucharest residential sector in the 6-6.5 percent range, but they can vary slightly depending on location, according to Colliers consultants.

“The private rental sector as an asset class is a relatively new phenomenon in CEE, and you certainly see less and less of it as you move farther east. Part of it is legacy-related: home ownership was always extremely high in CEE and reflected a mentality that said people needed to own their homes. That is no longer necessarily the case. As demographics

are changing and prices are steadily rising for development in congested areas, with opportunities becoming scarcer, and many people being priced out of the market for home purchases, we expect this asset class to take hold in CEE,” explains Victor Constantinescu, Managing Partner of Kinstellar Bucharest and Co-head of Firm-Wide Real Estate practice.

According to Eurostat data, the cost for building new residential units in the EU increased by 15 percent during the 2010-2019 period. Among CEE member states, the largest rises were seen in Hungary (+47 percent) and Romania (+46 percent). In this context, many developers across the region are not tempted to deviate from the build-to-sell model of individual units.