Houses built on sand

Introduction

Horia: „During the recent housing boom, if a house went on the market, the seller would get a dozen bids right away” said an American real-estate agent. „Today, however, that’s all changed. Although prices have softend slightly bidding wars are now a thing of the past and the number of unsold houses tripled since the last year”. America’s housing market is entering a crisis which can affect Europe too.

Romanian Housing Market Situation

Alex: The crisis in America didn’t affect Romanian housing market yet. The prices of a house from the center of Bucharest is about 2000 euros per square meter, being bigger than the ones in Bruxelles, Athens or Budapest. Despite the fact, that Romania’s GDP is three times lower than in Bruxelles, house prices in Bucharest are slightly higher than the other prices from the west capitals.

We can say that the ratio between the price of houses and the incomes in Bucharest, Kiev, Riga, Vilnius or Warsaw is higher than in other capitals of countries which are in transition. Nevertheless it is difficult to compare prices because quality and offer varies from a market to another. Further more, the fast growth of incomes and house prices tends to concentrate in capitals from the Eastern part of Europe.

Horia : The Romanian housing boom owes to the fact the Romanians started to earn more money and because of this they started to take more loans from the banks. A good example is one of the banks’ measures, to increase loans for houses. So a loan for 100.000 euros is easier to be paid in 40 years than in 25* . The single disadvantage is that with the interest from the 40 years loan you can buy the second house. There are some conditions too, when according these loans too. The client doesn’t have to exceed to age of 30 when he applies for a loan. Soon bankers guarantee us the age limit will be removed, so that Romanians can take life-loans. In case of death the debts can be paid by their children.

Housing Market Crash Hangs Over Romania

Alex : “A possible crisis over the house mortgage after the model from U.S.A., could take place in Romania too, in the next few years. This can be the cause of excessive high prices in the Romanian housing market”, explain the experts. The risk of a crisis in the Romanian mortgage system has been presented also by the British Financial Company EuroProperty. They predict house prices will drop with 30-40%.

The housing market will change starting 2008, when the prices of the old houses will stagnate and Romanians will be more interested in new built houses. The first persons who will suffer from the low cost of houses will be the mid class persons who already have mortgage on their houses. There is also a risk for the banks, but this is minor.

Income and Population Growth

Horia: The main determinants of the housing demand are demographic. However other factors like income, the price of houses, consumers preferences, investors preferences, all play an important role.

The demographic variables are population size and population growth: the more people in the economy, the greater the demand for housing. It is necessary to consider family size, the age composition of the family, the number of first and second children, net migration (immigration minus emigration), non-family household formation, the number of double family households, death rates, divorce rates, and marriages. In housing economics, the elemental unit of analysis is not the individual. Rather, it is the households which demand housing services: typically one household per house. The size and demographic composition of households is variable and not entirely exogenous. It is endogenous to the housing market in the sense that as the price of housing services increase, household size will tend also to increase.