By Property Secrets Investment Broker

The Romanian mortgage market is going to be utterly transformed in the next few months.

And the result - a huge surge in price growth.

Think I'm exaggerating? I'm not, and here's why....

It's a question of simple economics. The power of scarcity.

More money, much more money - and I'm talking about billions of euros - chasing a limited supply means prices will be driven up. That's how all markets work - simple supply and demand.

Property markets are classic examples of supply and demand. But what we must always remember is what fuels that demand, or makes that demand possible. It's credit, the ability and the means to borrow capital to make a purchase.

OK, so where is this avalanche of money coming from?

100% mortgages

Well, the mortgage market is set for a major and rapid expansion that will see the number of lenders approved by the central bank to offer 100% mortgages rocket from precisely ONE to double figures.

In fact, as many as 15 more banks are likely to win 100% LTV approval from the National Bank. That's how many have applications are currently up for approval.

Up to now, the highest LTV a Romanian borrower could obtain is 90% LTV. So, what these approvals represent is a massive 11% increase in borrowing power for locals. The effect of this extra money is obvious.

And the word is that these applications will not only be successful, they'll be hurriedly approved because the bank is facing accusations of favouritism after its approval of the first application, from Alpha bank.

What we'll see is a further aggressive drive among mortgage lenders to win market share in the increasingly competitive Romanian market. I think we'll actually see mortgage rates driven down to near margin as lenders compete for business.

Increased affordability

The obvious effect of this will be increased affordability for the emerging middle classes who are now really starting to grasp the concept of buying off-plan.

They have watched the nice modern developments go on to the market at one price - the off-plan price - watched them built and then decided they'd like to own one, only to be told that 1) There are none now for sale because they've been sold and 2) They all cost a great deal more than when they last asked.

To those of us in the West, this is what we are used to and we understand this is a function of the marketplace. For many Romanians, still adjusting to relatively new market freedoms and a new economic confidence, this was something of a revelation.

Well, not any more.

Just as we predicted they would, the queues are forming around the block when a new development comes to market at the off-plan stage. Romanians have got the bug - big time!

And supply remains limited.

For example, officially Bucharest has a population of 2.8 million but, in reality, this is more like 4 million - and yet only 3,000 new units were built in 2006.

Lines round the block

And what we've noticed over the last few months is a hurge surge in interest from buyers. I'm in no doubt that once we see this kind of expansion in the mortgage market we are going to witness phenomenal price growth.

We are right at the begining of an incredible growth spurt in this market in which demand far, far exceeds supply and the consequent effect on prices is clear.

Already Alpha Bank is now offering 100% mortgages to Romanians with no deposit, based on 65% of an individual's net income, and these new applications add up to borrowing capacity going through the roof.

Let the data do the talking

Let's put this into perspective with some figures.

We've long said that, in many ways, we see the Romanian market as a reflection of the Polish market several years ago.

One of the biggest factors in the rapid expansion of the Polish market was the liberalisation of the mortage market - increased LTVs, gradually coming up to 100%, lots of competition, borrowing rates driven down. The same pattern as we're seeing in Romania.

But how has the mortgage market actually developed in Poland?

Well, in 2002, mortgage borrowing represented a tiny 2.5% of Poland's GDP.

Now, bearing in mind that GDP has been galloping upwards in the last five years, that percentage rose to 7.4% of GDP by last year - 196% growth!

That represents massive, massive growth in terms of actual cash entering the property market.

And the current level in Romania? The last data available is for 2005 - and the penetration rate then? Just under 2%! The similarity with Poland five years ago is almost uncanny, I think you'll agree. I believe we can expect exactly the same kind of growth.

Measure of potential

Of course, what these figures really represent is a measure of the huge potential of this market.

When people talk about how expensive a market is, they often overlook borrowing capacity. In Romania, the mortgage market has only taken its first faltering steps on a journey that will power the property market at a staggering rate over the next few years.

We're already seeing the effects of this growth in the mortgage market on demand for new property.

Just released is The Old Bread Factory in the Titan District of Bucharest, which has 500 reservations for only 200 units. The New Town development, close to Platinum Towers in Vitan, has 460 people who have pre-registered for just 220 units.

With this kind of demand it is getting ever harder for foreign investors to get good deals.

Massive surge in demand

People are walking into developers' sales offices with pockets full of cash, handing over full deposits and even agreeing to multi-staged payments so they can secure a unit.

We tried to get units at both The Old Bread Factory and New Town but we lost out, not to other foreign investor groups, but to the local market. We simply couldn't negotiate the kind of terms that meet our own standards, so we had to walk away.

The demand is just going through the roof and if you get a deal, count yourself lucky if you can get terms of 25/75.

Just as we predicted, and as we have seen in other cities such as Warsaw and Krakow, where prices have shot up in value, the Romania property market will go ballistic.

The supply is just nowhere near enough to meet demand and it isn't going to be for many, many years at the current rate because new units aren't coming on to the market fast enough.

And while developers are now trying to move in on Romania, and in particular Bucharest, they are hindered by an arduous and long planning process, which is also increasing the supply-demand gulf.

I believe that this forthcoming development in the mortgage market really represents the start of Romanian property taking off in a quite spectacular way.

Good deals are going to become increasingly rare and harder to negotiate, so there is a genuine urgency to get into this market for any investor who can see the obvious potential.

For me, it's as clear as day - if you can find a good offer grab it otherwise you'll be locked out of the market as the quality deals begin to dry up.