With the credit crisis unfolding we are witnessing quite different residential property price reactions in various regions. Those regions where price falls / looming issues are greatest (i.e. The US, Spain and Ireland) seem to have one common feature, oversupply. This structural issue can take quite some time to correct – see Japan (coming off a 1980’s asset price bubble and faced with an aging/declining population) and Germany (suffering from overbuild post reunification with the East) over the previous 10 – 15 years.

Conversely, over recent years the ex soviet block countries have suffered from an undersupply of decent quality housing and an increasing number of households, both of which have helped pushed house prices up (plus other factors).

My question is; What analysis / views does PS have any on nationwide supply situations in the various markets it analyses? Are national statistics available on both the number of households and age demographics – thereby allowing, with some assumptions, an estimate of what new household formation is required? Armed with this information, the question of whether the last few years of supply exceeds or falls short of demand can be assessed and markets with oversupply risks avoided.

All very back of the envelope calculations I’m sure, but I think a rough ‘health – check’ would be useful to calm any fears that the recent Polish, Romanian, Slovenian etc real estate gains haven’t been the first phase of a boom bust cycle, but, instead, these residential real estate markets are fundamentally sound in the long term. Furthermore, for me at least, it would provide some direction as too which countries I should focus my attention on going forward.

In Slovakia and Bratislava in particular there is a massive shortage of housing stock, which is one of the reasons why it's so attractive as an investment location. The number of dwellings is 309 per 1000 inhabitants compared to the EU average of 450. It would be interesting to see stats for other CEE countries.
Huw

Hi GeorgeH - this is a very good question.

The answer is that, as Huw suggests, the under-supply In CEE is massive - a 20+ year undersupply in most cases.

As the under-supply is so large, there hasn't been a lot of value in reporting this figure - which is why it hasn't featured much on this site.

The more difficult question you have to answer before you can estimate undersupply is how many people should live per unit? And what quality of property will they accept?

The answer to this is that young professional people in these countries will leave the old housing and move into the new build properties and will live at densities that reflect those of the EU average.

Therefore, the real determinate of supply and demand on a year by year basis (as opposed to a 20 year scale) is the rate of growth of young professionals.

Hence, it is better to follow job creation and salary rises for the rising white collar middle classes - rather than the traditional numbers.

This is what we attempt to do with our Market Profiles - and obviously, is based on the economic growth of the country/ city.

Because what we are really interested in is the supply and demand of new build property, isn't it?

Still, I think that your question is a good one - and perhaps one we should schedule for a regular review / update. I'll suggest our editorial team take a look at the most valuable way to do this.

Cheers
Neil

Hi Huw,

Here are indicators for other CEE countries (number of dwellings/ 1, 000 population):

Bulgaria – 465
Romania - 380
Czech Rep. - 430
Poland – 340
Hungary – 430
Latvia – 435
Estonia – 465
Lithuania – 385

But also:
Albania – 254
Macedonia – 343
Ukraine - 380

Those indicators are significantly different for cities, for example:

Sofia, Bucharest, Kiev and Vilnius – 435
Budapest – around 520
Prague – 500
Bratislava, Warsaw – around 460

(The EU 15 capital cities average is 490)

Following, the highest housing shortage is in Kiev (315,000 units), Bucharest (135,000 units) and Sofia (82,000 units).

(BTW - those figures could be found in our market profiles)

The housing shortage and demographics are indicators of markets' potential, a potential which without affordability (mortgages) can’t be realised.

Anna

Guys - do remember that when you look at a city like Warsaw you would expect a large single (ie one person per dwellings) workforce and therefore the number of inhabitants per dwellings per 1,000 population would be much higher in Warsaw than in other cities - for example.

The key here is that the difference is sustainable - because Warsaw attracts a young mobile worforce - rather like other large capital cities.

So, you do have to be a bit careful when interpreting these numbers or using them to pick favourite investment locations.

Cheers
Neil

Thanks for your prompt reply, these types of figures are what I was after and look quite reassuring.

On your approach of focusing on salary growth in young professionals, this seems very logical for a (rapidly) growing economy (with a shortage of young professionals). In an economic slowdown or downturn, however, I feel a broader approach is needed and I would want to know

1. What is the premium of new vs old property?
2. What is the overall supply of property (new and old)?

If these answers are both ‘large’ then the young professionals are quite flexible to downsize / stop purchasing, leading to the rug being pulled out from under the ‘new property’ market.

However, the household information you have given answers the second of my questions above and I am sure, with some digging on the net, I can answer the first myself.

I should add that I am not expecting a significant downturn in the new EU entrant property markets, but I do worry that sound investment approaches have a habit of unravelling in market downturns, especially in markets which recently experienced large gains.

Anna, I know it's a different type of market to the others but could you find the figures for Cyprus please.

I can only find the number of build permits for residential units issued each year and the estimated population until 2052 which doesn't show much growth at all - somewhere around the current 800,000. But I can't find the number of dwellings already built.

Jo

1. What is the premium of new vs old property?
2. What is the overall supply of property (new and old)?

This is an interesting situation that certainly applies to the market I bought into in Hungary.

I would say the premium is a good 20% - but it is worth it since old apartments have high ceilings and poor central heating systems - drafty windows. It can get very cold in winter. It is the rising price of fuel / gas to heat homes that is the deciding factor right now.

Whilst property prices are still underpriced (which they are in Hungary about 20% below average for EU capital city) and as building development costs will rise by 20% over the next few years due to commodity price increases alone.

The way I look at it new builds will eventually get too pricey due to commodity price increases and thus there will be fewer residential developments built (far fewer planned this year and next = from oversupply to lack there of) and as a result this will raise the classical older apartment values as demand increases, however we are some years away from that point.

No matter where you are invested in the new accession countries prices will continue to rise due to the cost of development.

I paid about 1,450 Euro per sqm for this apartment, 2 bed with the best view in the development and prices now are about 1,850 and we are 12 months into an 18 month development. This development sold out phase 1 a good 8 months ago.

Certainly no shortage of demand here for good quality developments.

Property secrets ... what would you say is the average prices per sq metre for capital city apartments EU wide?

Hi Jo,

Cyprus has around 435 dwellings per 1,000 population. Unfortunately, I don’t have any figures for cities.

Anna

Thanks, that's good enough info.