Apartments in Sofia are so Expensive they Set Records. Is the Property Market Overheated?
Do you remember the boom in real estate prices from 2008 just before the start of the global financial crisis. Well, it turns out that some properties in the Bulgarian capital are even more expensive than then, based on their sales prices. More specifically, it is about the three-room housing in Sofia. A report indicates that by mid-August the offer prices for this type of dwelling are at a level of EUR 90,250 compared to an average of EUR 89,775 on a property in 2008. Certainly, the data gives rise to concern over the property market as a result of the booming housing prices. For the past three years, average property prices have added more than 30% to their values. There is no way not to recall a graph that points to real estate prices targeting their highest pre-crisis rates and worrying closeness to them.
As can be seen from the graph, other types of properties, apart from the three-story, have not yet peaked since 2008. But they very close. The closest to peak values are property prices of four-room apartments, which are less than 10% of these levels. Nearly 15% of the top are two-room properties. Furthest to their record sale prices are single-room - about 25% of them. Data may be the first major symptom of "overheating" on the property market. In this regard, we can point out several factors that may still be of concern to market segment participants.
The rise of prices of properties in the defrost the market and a lot of projects were restarted. A report for Sofia indicates that in the second quarter, were commissioned about 6,000 square meters. By comparison, in the second quarter of last year, the areas put into operation were only 1,634 square meters, according to NSI statistics. The building permits in Sofia were for 205 new buildings in the first quarter of this year, with a total area of 301,000 square meters and 216 new buildings - in the second quarter for a total of 362,000 square meters. For comparison last year 157 permits for construction in the first quarter were issued for nearly 200 000 square meters and 207 permits in the second quarter for 249 000 sq. m. There were fewer permits in Sofia in 2016 - 186 in the first quarter for 188,000 square meters and 170 in the second quarter for 205,000 sq. m. Or there is a serious increase is both in the number of permits and in the total area.
Undoubtedly, the rise in property prices is supported by their investment demand. After returning the depositors' money from the bankrupted KTB bank, most of them began looking for a better investment alternative for their funds, in a record low interest rate environment. And the properties proved to be the natural choice for the traditionally conservative in their investments Bulgarians. Capital properties have rental yields of about 5% on an annual basis, which is still at times higher than the best interest rates on one-year deposits - at levels of about 0.9%. The strong appreciation of properties so far has been accompanied by a comparable increase in rents. The latter, however, can hardly continue to rise at their current rates, given that they are tied to the real income of the population, whose growth is far weaker.
Negative effects on property and rent prices may also be expected in the event of a potential increase in interest rates on loans and deposits possibly in the next year (when the ECB is expected to end its incentive program and resort to its first interest rates). In conclusion, the rise in property prices over the past two or three years can hardly continue at the current pace, in an environment of expected increase in supply and reach a peak in rental prices. The rise in interest rates may be another factor in the future to curb the rise in prices on the "hot market."
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