WHICH CENTRAL EASTERN EUROPEAN COUNTRY HAS THE GREATEST POTENTIAL FOR HOUSING MARKET RECOVERY?

Abstract

This paper is concentrated on analyzing the CEE countries¥ housing and lending market development in 2002-2009. Some of the CEE countries (Bulgaria, Latvia, Lithuania, Romania, and Slovakia) have experienced 250-400% price increases at the peak of the real estate boom in 2007-2008. Other countries in the region (Hungary, Slovenia, Czech Republic, Poland, and Estonia) have had less extensive price increases between 160% and 250%. By the time of 2009 and early 2010 the real estate prices have declined in the region mostly 10-30% from the peak. Most of the CEE countries experienced 50-90% annual increase in housing debt, which by 2009 was highest in Estonia and Latvia (42.6% and 35.4% of GDP). For example Estoniaís housing debt to GDP is above the euro zone average (38% in 2008, ECB). The second group is Czech Republic and Lithuania ñ they both have approximately 21% housing debt to GDP ratio and the others have less than 15%. The aim of this paper is to understand: which of these countries have the greatest potential for housing market recovery? I have conducted comparable analysis of these countries and their real estate and lending market. I have collected data from central banks, national statistic offices and real estate companies. The results suggest that countries with higher housing debt had stronger real estate booms and the current bust-cycle has caused much steeper decline in prices. The outstanding housing debt in 2009 is in some cases 2-5% smaller than the previous year and only in Slovenia, Slovakia, Czech Republic and Poland have seen 6.75-10.59% increase in housing loans. The total of outstanding loans may have been decreasing or slightly increasing for some countries, but overall housing loans to GDP ratio has been growing even after the recession started, because the GDP of the CEE countries (exception is Slovakiaís forecast for 2009, Eurostat) has contracted. This has had paralyzing effect on the demand for homes and therefore has caused the steep fall in real estate prices. It has to be mentioned that big part of lending has been made in Euros and some of the currencies, which are not pegged to Euro (CZK, HUF, PLN, RON), have lost 14-33% of their value comparing to Euro (ECB). This means that with falling GDP and rising unemployment, many lenders have to pay their Euro-based loans with weak currency. As a conclusion it can be stated that real estate markets in countries with similar macroeconomic conditions, that are less exposed to housing loans have highest potential for faster recovery in housing market.