Last year housing prices in major cities in Bulgaria rose by nearly 10% - at least according to official statistics. This is one of the fastest rates in the EU, where the average price increase is 4.6% on an annual basis. Real estate agencies, relying on their own data, report an increase of 10-12 percent. Prices in Sofia, according to them, have exceeded 1000 euros per square meter, and in separate quarters - 1300 euros.

The market in Sofia has already exceeded the 2007 level. Remember, the peak of housing prices was in 2008, when after a jump of 28% they reached 1191 euros on average for the year. In some areas of the capital, the peak levels have already been exceeded. In the countryside, the growth is more balanced, which is the obvious consequence of the overconcentration of people and business in the capital.

Household price growth (average for the country below 7%, with inflation deduction) clearly outpaces the economy (around 4%). This raises the question whether the real estate market is overheating and whether the appreciation will continue. The data still does not suggest talking about a bubble that is about to burst. Although the rate of increase in prices is high and a speculative element can be seen, this increase corresponds to income growth (10%). It can also be argued that the growth of foreign tourists (9%) and domestic consumption contribute to interest in holiday properties and retail space.

The property market requires increased attention - it is no coincidence that this is one of the macroeconomic imbalances that the EC monitors.

The rapid rise in prices is a warning signal

 However, there are two major differences with the pre-crisis situation, which are a prerequisite for a slower rise of properties now. The first is the worsening demographic situation. For 10 years, the population of Bulgaria melted by half a million people. This means that 100-200 thousand less homes are needed. These data do not take into account the full effect of emigration (people working abroad, students, etc). Secondly, thanks to the pre-crisis boom there was a saturation of housing, and although after 2008 the new construction stopped, supply was enough. According to a recent World Bank report, over 1.2 million homes in Bulgaria are empty (half in cities). The proportion of so-called dark windows is one third, including 25% in cities.

The acceleration of new construction in recent years has also countered the rise in prices. The construction of new buildings (based on total built-up area) in the nine months of 2017 increased by 19% compared to the same period in 2016 and was almost double the 2010 crisis.

All these factors, which are sometimes missed by forecasts, keep the price rise below 10% on average for the country - far from the boom before the crisis. Many people then acquired housing almost entirely with credit because of the confidence that prices would continue to grow. Among the house buyers there were many families who had lived on rent or in an inherited home. Unlike now, there was a serious interest of foreigners in some segments.

The main driving force on the market today is the combination of rising incomes and low interest rates. Many people are buying investment properties. Often they look at the second home as a source of income, as an alternative to retirement provision.

This is a phenomenon that requires serious attention as it reflects the mistrust in the constantly changing retirement rules and possibly also in the supervision of financial institutions. That is, we have another example of how fairly and inadequately are regulations controlled (in the case of private pension insurance) can contribute to macroeconomic imbalances as a side effect. It would not be so if the capital market provided a broad alternative.

The contribution of low interest rates is double-sided. On the one hand, loan interest rates have fallen more than twice compared with pre-crisis rates. The average annual percentage rate of charge (APR) for new housing loans in BGN is 4.19% - at over 9% in 2007. The average interest rate is even lower (3.79% in November 2017). However, APR, which includes all credit costs and takes into account the value of money over time, is a better indicator. But we have to account for another - in 2007, the average annual inflation rate was over 8%, while in 2017 it was only 2%.

For a long time, people refrained from buying housing on credit, and even when prices began to rise, credit intermediaries reported relatively high levels of self-participation. But the latest data from the BNB show a change in the trend, with newly-released housing loans reaching record levels in June and November. At the same time, there seems to be a loosening of credit standards. If in autumn the demand for self-participation was 15% and even 20%, many banks now lend up to 90% of the value of the property (under the full responsibility of the borrower and usually the transfer of salary). Some have lowered interest rates below the psychological level of 3%.

At the same time, low interest rates on deposits (an average of 0.16% on citizens' deposits) have made many savers look for an alternative. With regard to inflation (and in some cases also to fees), interest rates on deposits are already negative. Nevertheless, the deposits of citizens grow - from 44 billion BGN in November 2016 to 47 billion BGN last November. These impressive savings, outlined by accelerating inflation, are perhaps the most serious factor in the revival of the property market. If there is a risk for the property market, it will come precisely along the lines of inflation expectations (buying a property is seen by many investors as a way to preserve the value of money).

The problem of investment property demand is related to the difficulties in calculating and forecasting the income from them. This is due to the lack of reliable market statistics, including rentals. Based on unofficial rent data in Sofia, it can be argued that rental income is 5-7% annually.

 In order to be comparable to investment instruments, such income must be deducted from the cost of maintaining and repairing the dwelling and assessing the likelihood that it will remain without tenants at certain times. Taxes (including local ones) must be taken into account. They are higher than the tax on interest, and for many investment income there is no taxation. By rough calculations, real net rental income with deduction of costs and inflation is 2%, in some cases 3%. What it will be after 10 and 15 years is hard to say, as it is difficult to say how much the price of property will increase. Considering the depopulation and cost trends, the better strategy is to invest in logistics areas or even garages than in homes.

When we talk about a long-term perspective, buyers should also appreciate the fact that the extremely favorable interest rates that push the market upward will not be forever. It is expected that at the end of this year, the ECB will announce when and how it will suspend the so-called quantitative easing and start raising interest rates. This means that the market for a longer period should be the economy and the achievement of sustainable levels of convergence of the Bulgarian economy with the European economy.

Although property brokers are convinced that the key price factors are location and type of construction, the reality has so far shown that much more important is how the economy develops and manages.

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