Despite many voices announcing the "collapse" of the real estate market due to a speculative bubble, residential properties in Romania's major cities continued to rise in overall value, according to the Kiwi Finance index. Encouragingly, they have reached record levels of affordability, as the demand for new units far exceeds the supply. However, mortgage lending has declined, no longer providing support for transactions.

A cautious approach

The rapid improvement in housing affordability in major cities is attributed to salaries increasing three times faster than average housing prices and a significant drop in property sales.

This effect is particularly felt in the new housing segment due to the caution of buyers, who are hesitant to accept the high price levels set by real estate developers faced with substantial construction cost increases and rising interest rates.

Kiwi Finance, Romania's largest credit broker, ended 2022 with a record level of intermediated loans, amounting to 400 million euros, a 15% increase, nearly five times faster than consumer credit across the banking system, generating around 45 million lei in business. Of the loans intermediated by Kiwi Finance, 91% are mortgage loans, and 9% are consumer loans.

Mortgage lending decreases by 50%, masked by refinancing

During the first semester of 2023, the volume of loans intermediated by Kiwi Finance reached 800 million lei, a 15% decrease compared to the previous semester (S2 2022) and a 19% decrease compared to the same period a year ago. Mortgage lending has been affected by the increase in interest rates, particularly the IRCC and ROBOR indexes, as well as consumer prudence.

Despite these declines, Kiwi Finance has significantly outperformed the market, which seems to have halved on the mortgage credit segment.

According to the National Bank of Romania's statistics, the level of new loans granted to the population across the banking system slightly increased in the first five months of 2023, from an equivalent of 20 billion lei to 21 billion lei. However, BNR's statistics might mask a strong decrease in genuinely new loans, as the reported "new" loan volume also includes refinancing and reclassification of loans, which have had a significant impact, especially with the shift from ROBOR to IRCC.

BNR's recent report states that in the first quarter of 2023, the volume of genuinely new mortgage loans decreased by 50% compared to the first quarter of 2021. This implies that these operations might have been included in the total volume of reported "new" loans and even exceeded the volume of genuinely new loans.

Furthermore, without the support of mortgage lending, the ANCPI's statistics show that during the first six months of 2023, the number of transactions for individual units (apartments) decreased by 22% compared to the same period last year (S1 2022) and by 26.1% compared to the previous semester (S2 2022).

More expensive, yet more accessible homes

By the end of the first semester of 2023, the Kiwi Finance real estate index for apartments and houses reached a value of 1,483 euros/sqm, a 5.5% increase compared to the value at the end of the third quarter of 2022 (1,406 euros/sqm). This index is unique in the entire market as it is based solely on transaction values, not advertisements.

Simultaneously, the national average net salary increased by 15.5%, reaching 4,543 lei (915 euros) in May 2023, up from 3,933 lei (800 euros) in July 2022. Consequently, the aggregated housing affordability index improved significantly to 1.62, a record level, from 1.76 nine months ago. However, this national statistic might not be as relevant as the trends observed in major cities.

Among the major cities, the housing affordability index reached its best value in Bucharest, with only 1.38, due to a substantial improvement in accessibility, followed by Timișoara, where the affordability index reached 1.30, both values representing records.

Timișoara achieved this rapid improvement in housing affordability, the most accelerated among the major cities, due to having the highest salary growth in the country for the last ten months, 20.5%, reaching 5,157 lei (1,039 euros), while housing prices increased only by 1.2%, reaching 1,347 euros/sqm, according to the Kiwi Finance index.

In the same period, the average net salary in Bucharest increased by 15.6%, reaching 6,042 lei (1,217 euros), while the average housing prices rose by 5.8%, reaching 1,685 euros/sqm, according to the Kiwi Finance index.

Sibiu and Ilfov rank next in the housing affordability index among the major cities, with values of 1.41 and 1.48, respectively. In Sibiu, housing prices increased by 4.1%, reaching 1,324 euros/sqm, while salaries advanced by 13.5%, reaching 4,677 lei (942 euros). In Ilfov, housing prices recorded the most significant increase, 15.5%, reaching 1,390 euros/sqm, but salaries grew even faster by 20%, reaching 4,669 lei (941 euros), according to Kiwi Finance and INS data.

Brașov and Cluj-Napoca follow in the housing affordability index, with indices of 1.61 and 1.69, respectively. In Brașov, housing prices rose by 2.2% to 1,328 euros/sqm, while the average net salary increased by 11.3% to 4,103 lei (827 euros). In Cluj-Napoca, housing prices increased by 11.6% to 1,864 euros/sqm, while salaries rose by 15% to 5,470 lei (1,102 euros).

Constanta and Oradea, which previously had the most expensive housing in relation to salaries nine months ago, have both experienced strong improvements in housing affordability, the most significant since Timișoara, with values of 1.75 and 1.81, respectively. In Constanta, housing prices decreased by 1.5% to 1,409 euros/sqm, while salaries increased by 16.2% to 4,005 lei (807 euros). In Oradea, housing prices decreased by 3.7% to 1,269 euros/sqm, while salaries increased by 9.2% to 3,471 lei (699 euros), according to Kiwi Finance.

Apartments experienced accelerated price increases in Ilfov and Cluj-Napoca

Although salaries increased significantly, apartment prices skyrocketed in the last nine months in Ilfov and Cluj-Napoca, increasing by 24.3% to 1,569 euros/sqm and 17.5% to 1,963 euros/sqm, respectively, according to the Kiwi Finance index. These rapid apartment price increases compared to salary growth resulted in Ilfov and Cluj-Napoca being the only cities where apartment affordability decreased compared to September 2022, reaching 1.67 and 1.78, respectively.

The most affordable apartments in relation to salaries are now in Timișoara, following a rapid improvement, followed by Bucharest, where the affordability index reached unmatched values of 1.32 and 1.38, respectively. While salaries increased significantly in Timișoara and Bucharest, apartment prices remained relatively stable in Timișoara, reaching 1,376 euros/sqm, while in the capital, they rose by 5.3% to 1,683 euros/sqm.

On the other hand, the cities with the least affordable apartments nine months ago, Constanta and Oradea, are the ones that now registered the only decreases in average prices, by 4.1% to 1,518 euros/sqm and by 6.8% to 1,331 euros/sqm, respectively. This trend contrasted with the market, according to the Kiwi Finance index, resulting in a significant improvement in apartment affordability in these two cities, reaching 1.88 and 1.90, respectively.

Conversely, Brașov now has the least affordable apartments among the major cities in the country, despite its affordability index improving to 1.96 due to a slight increase in average prices by 2.7% to 951 euros/sqm, much slower than salary growth.

Additionally, in Sibiu, average apartment prices increased by 7.1% to 1,395 euros/sqm, resulting in an affordability index of 1.48, the third-best value after Timișoara and Bucharest.

Bucharest remains the European capital with nearly the most affordable apartments

When looking at all 36 capitals in Europe, Bucharest offers the cheapest apartments in relation to salaries, second only to Brussels, which is an atypical city due to its status as the "EU capital," according to a comparative analysis based on data from Numbeo.

As mentioned earlier, apartment affordability in Bucharest significantly improved to 1.38, based on data from the Kiwi Finance index, which is almost identical to the affordability index reported for Brussels nine months ago.

However, during this period, average apartment prices in Brussels slightly decreased by 2.3%, while salaries increased by 10.4%, leading to an improvement in apartment affordability to 1.22, down from 1.37 previously.

Confirmed predictions - a decrease in the number of transactions, primarily for new units

In previous analyses from May and October 2022, it was warned that, given the multiple challenges and uncertainties regarding the geopolitical situation in the region, the energy market in Europe, the central banks' struggle with global inflation, and major recession risks in various parts of the world, the demand in Romania's real estate market might experience significant declines, both in terms of purchasing intentions and solvency due to rising financing costs. This trend has been ongoing for several months and has continued in the same direction.

It was also mentioned that the supply side might encounter temporary blockages in the new property segment, as prices pressed by rising material costs, labor, and energy expenses might not meet the demand, which has proven to be true. Consequently, the downward adjustment in demand has been reflected more in the old property segment, rather than the new property segment.

For the foreseeable future, no improvement in demand availability and solvency is expected due to the risks looming on the horizon, consumer sentiment erosion during this period of high inflation, and increased financing costs.

This implies that we may continue to see a slowdown in new property sales, and the redirection of demand towards older properties will likely continue to improve affordability to new record levels.

(An analysis by Marius Pîrloiu together with Kiwi Finance.)