Romania has been in a real estate bubble for the last year, but the developers and owners don’t admit that. For them, the current prices are adapted to the market conditions. But we have witnessed this before, in 2010. For those who think the current real estate market prices are the real deal, 2022 comes with bad news: the real estate bubble is about to pop.
The prices skyrocketed in Bucharest, Cluj-Napoca and other major cities
In 2020 and 2021, despite the crisis that hit many countries globally, the prices of apartments skyrocketed in Romania. Apartments cost 1,960 EUR/sqm in Cluj-Napoca, while in Bucharest, the country’s capital, they cost around 1,630 EUR/sqm. Other cities have high prices, such as Brasov, in the center of the country, near the famous mountain resorts of Prahova Valley, with 1,380 EUR/sqm.
On average, the prices per square meter increased by 15% y/y in the major cities, except for Timisoara, where the prices soared by only 5% compared to 2020.
As the access to loans is not limited, but, on the contrary, encouraged by the Romanian state, tens of thousands of young people are contracting real estate loans from the banks. The ‘First House’ program initiated by the government in 2009 guarantees loans up to a certain sum. Anybody who can prove a stable revenue can access the program. The applicant has to come with an upfront payment of only 5% of the sum to be credited if the house is valued below 70,000 EUR. If the value is more than 70,000 EUR, the applicant has to come with a downpayment of 15% of the deal.
On top of that, the VAT for purchasing a new house is reduced to 5% in certain conditions, which encourages people to storm the banks demanding real estate loans.
This is why Romania has the highest percentage of owners in real estate from all other Europeans.
When will this bubble pop?
If you listen to the developers, they say Romania is not in a real estate bubble and the market is at the correct level. We think they’re wrong.
The prices for construction materials soared because of global inflation. Even in Romania, there is an inflation of 5% in 2021 and an additional 5% in 2022.
Despite Romania’s economic predictions for 2022, which are somewhat optimistic, the real estate market is expected to pop this year. On the one hand, the National Bank of Romania has harshened the conditions to take a loan – the upfront payment must be at least 25% of the total value of the loan. This will hinder more people from being accepted for contracting a loan in the first place.
On the other hand, the prices are too high for an already saturated market. Those who wanted to buy because of the pandemic, encouraged by companies’ ‘work from home policies, have already done that. Those currently looking for a house in 2022 are more prone to wait than rush to buy at the current prices.
Besides, the soaring energy and gas prices will make people think twice before moving out of their current homes. At the same time, the prices for food and services have increased lately, even by 25-30%. Disregard the income, potential buyers have to consider everything before making such a large purchase as a house.
This is why we consider that the real estate market is likely to crash in 2022. The last burst of the market was in 2010 when the crisis dropped the prices of apartments even by 50%. This time, it could be a smaller drop, but our advice for all the investors and buyers would be to consider all the variables before buying a house in 2022.
It’s not financial advice or anything else, but some authors, including ‘Rich Dad’ writer Rober Kiyosaki, consider it’s better to rent a house than buy it. Who knows? Maybe the next real estate bubble will finally teach Romanians a lesson.