Romania’s house prices continue to rise strongly. The economy is growing well, but in the context of a worryingly inflationary environment. The government´s budget deficit is rising, the trade and current account are deteriorating, and the Romanian Leu (RON) is falling. Politics remain unstable and there are high levels of corruption and popular dissatisfaction.
During 2019, the average selling price of apartments in Romania soared by 8.23% y-o-y (4.02% inflation-adjusted) to €1,341 (US$ 1,488) per square metre (sq. m.), following y-o-y rises of 6.44% in 2018, 10.86% in 2017, 10.41% in 2016 and 6.73% in 2015, based on the figures from imobiliare.ro.
During the latest quarter nationwide house prices rose by 5.42% (4.45% inflation-adjusted) (q-o-q) in Q4 2019.
All major cities in the country saw house price rises during 2019:
- In Bucharest the average selling price of apartments rose by 5.84% (1.73% inflation-adjusted) y-o-y to €1,413 (US$ 1,568) per sq. m.
- In Cluj-Napoca, Romania’s fourth most populous city, apartment prices rose sharply by 10.1% (5.82% inflation-adjusted) y-o-y to €1,712 (US$ 1,900) per sq. m.
- In Constanta, the country’s oldest city, apartment prices rose by 8.33% (4.11% inflation-adjusted) to €1,210 (US$ 1,343) per sq. m.
- In Timisoara, the average selling price of apartments went up by 5.47% (1.37% inflation-adjusted) to €1,273 (US$ 1,413) per sq. m.
- In Brasov, the average selling price of apartments rose by 6.9% (2.74% inflation-adjusted) to €1,178 (US$ 1,307) per sq. m.
Demand remains strong. In the third quarter of 2019, the demand for residential dwellings in Romania’s six biggest cities surged 16% y-o-y to about 175,000 units, according to real estate intelligence platform Analize Imobiliare. This is in line with figures released by the National Agency for Cadastre and Real Estate Advertising, which showed that the total number of real estate sales transactions in Romania rose by 11% y-o-y to 382,996 units in the first three quarters of 2019.
Yet residential construction was almost steady. In the first eleven months of 2019, the total number of residential building permits in Romania fell slightly by 1.5% to 39,359 units from a year earlier, according to the National Institute of Statistics (INS). The area of residential building permits issued increased marginally by 0.6% y-o-y to 10.02 million sq. m. in Jan-Nov 2019.
Romania’s GDP grew by 4.1% in 2019, following y-o-y expansions of 4% in 2018, 7% in 2017, 4.8% in 2016, 3.9% in 2015 and 3.4% in 2014, according to the European Commission (EC). The government targets economic growth of 4.1% this year.
There are no restrictions on foreign nationals acquiring dwellings in Romania. Ownership of land is tricky, but companies incorporated in Romania as well as resident foreign nationals and non-resident EU citizens can acquire land.
History: Romania’s great housing market collapse
Romania’s economy grew robustly from 2001 to 2008, with an average annual real GDP growth rate of 6.6%, according to the IMF. From 2002 to early-2007, property prices and demand rose in anticipation of EU accession, which took place in January 2007. But investors were disappointed by non-implementation of economic and political reforms, which had been promised as part of EU accession conditions. Corruption remained rife, largely tolerated by the government.
Then came the euro-crisis. GDP plunged by 5.5% in 2009 and fell by another 3.9% in 2010. House prices plunged by 20.62% (-24.18% inflation-adjusted) y-o-y in 2009 and by another 15.88% (-22.07% inflation-adjusted) in 2010. The housing market remained depressed for the next four years, with prices falling every year from 2011 to 2014.
Overall, house prices fell by more than 57% from 2008 to 2014.
The housing market started to recover in 2015, with prices finally rising by 6.73% (7.46% inflation-adjusted) from a year earlier, thanks to improving economic conditions. The housing market has continued to strengthen since then, with house prices surging by 10.41% (10.51% inflation-adjusted) in 2016, by 10.86% (8.06% inflation-adjusted) in 2017, by 6.44% (3.32% inflation-adjusted) in 2018 and by another 8.23% (4.02% inflation-adjusted) in 2019.
HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: imobiliare.ro, Global Property Guide|
Residential demand rising strongly
In the third quarter of 2019, the demand for residential dwellings in Romania’s six biggest cities soared 16% y-o-y to about 175,000 units, according to real estate intelligence platform Analize Imobiliare.
Over the same period:
- In Bucharest, demand for houses and apartments increased 12% y-o-y to 90,100 units
- In Cluj-Napoca, demand surged by 32% y-o-y to 18,900 units
- In Timisoara, demand rose by 19% y-o-y to 18,900 units
- In Brasov, demand rose by 14% y-o-y to 16,900 units
- In Constanta, total demand increased 18% y-o-y to 16,800 units
- In Iasi, demand rose by 16% y-o-y to 13,600 units
In the first three quarters of 2019, the total number of real estate transactions in Romania rose by 11% to 382,996 units compared to the same period in 2018, according to the National Agency for Cadastre and Real Estate Advertising. Bucharest registered the highest number of transactions of 66,447 units in Q1-Q3 2019, followed by Ilfov (33,989 units), Timiș (22,804 units), Cluj (21,013 units), Brașov (19,898 units), Iași (12,901 units) and Constanța (12,164 units).
Residential construction activity almost steady
In the first eleven months of 2019, residential building permits in Romania fell slightly by 1.5% from a year earlier, according to the National Institute of Statistics (INS) – after y-o-y growth of 2.6% in 2018 and 7.6% in 2017. On the other hand, the area of residential building permits issued increased marginally by 0.6% y-o-y to 10.02 million sq. m. in Jan-Nov 2019.
- In Bucharest-Ilfov, residential building permits plunged by 15.7% y-o-y to 4,580 units in the first eleven months of 2019
- In the West, permits fell by 11% y-o-y to 3,879 units
- In the Northeast, permits fell slightly by 0.5% y-o-y to 7,381 units
- In South Muntenia, permits dropped 0.3% y-o-y to 5,776 units
- In Southeast, permits rose by 10.4% y-o-y to 5,015 units
- In Southwest Oltenia, permits rose modestly by 3.3% y-o-y to 3,221 units
- At the Central region, permits rose by 4.4% y-o-y to 3,673 units
- In the Northwest, permits were up slightly by 1% y-o-y to 5,834 units
As of Q3 2019, there were about 10,200 apartment units available for sale in Bucharest; 3,600 units in Ilfov; 1,700 units in Timisoara; 1,600 units in Brasov; 1,100 units in Cluj-Napoca; 1,100 units in Iasi; and 600 units in Constanta, according to Analize Imobiliare.
Interest rates steady
The National Bank of Romania (BNR) kept its policy rate unchanged at 2.5% in January 2020, after three consecutive rate hikes in 2018, amidst a moderation in inflationary expectations and an economic slowdown. The deposit facility rate and the lending facility rate were also left unchanged, at 1.5% and 3.5%, respectively.
Interest rates on new RON-denominated housing loans:
- Floating rate and up to 1 year initial rate fixation (IRF): 5.35% in November 2019, down from 5.75% a year ago
- Over 1 and up to 5 years IRF: 5.96%, slightly up from 5.83% a year earlier
- Over 5 and up to 10 years IRF: 6.29%, down from 6.61% a year earlier
- Over 10 years IRF: 5.48% in November 2019, down from last year’s 5.73%
For outstanding loans:
- Up to 1 year maturity: 6.13% in October 2019, slightly down from 6.17% a year ago
- Over 1 and up to 5 years maturity: 5.56% in November 2019, down from 5.76% a year ago
- Over 5 years maturity: 5.56% in November 2019, slightly down from last year’s 5.69%
For euro-denominated loans, the average interest rate for those with 1-5 years maturity was 5.42% in November 2019, down from 5.76% a year earlier, according to the BNR. Likewise, interest rates for loans with over 5 years maturity fell slightly to 3.72% from 3.83% a year ago.
Around 71% of outstanding housing loans were RON-denominated in November 2019, up from 66% a year ago and a huge increase from just 5.5% from 2010 to 2013. Euro-denominated housing loan interest rates accounted for 27% of total outstanding housing loans in November 2019, down from 32% a year earlier and around 82% from 2010 to 2013.
The Central Bank has shifted homebuyers’ preferences to local currency by limiting the "Prima Casa" or "First Home" programme to RON-denominated loans ("First Home" loans are almost 50% of total outstanding housing loans).
The mortgage market is booming
Romania’s mortgage market remains small by international standards, at just 7.82% of GDP in 2019. From 2008 to 2018 housing loans outstanding have grown by almost 17% annually.
It might have been expected that mortgage growth would have been stalled by the passage, in early 2016, of the "Legea darii in plata" law, allowing a borrower to close his mortgage debt by handing back his property to the bank, with no other obligations.
However mortgage growth has not stalled. Housing loans increased by 10.4% y-o-y in November 2019 to RON 80.39 billion (US$ 18.66 billion), according to the National Bank of Romania.
The mortgage market’s strong growth has been buoyed by the government’s "Prima Casa" (First Home) programme, launched in May 2009, which supports first home purchasers who have not previously had a mortgage.
The government guarantees 80% of the value of the loan, up to a maximum credit amount of 60,000 euros, and there is no age limit for the beneficiaries. The credit period is 10-30 years. Accepted earnings are the standard accepted by banks: earnings from salaries, pensions, copyrights, life annuities, dividends, and earnings from independent activities, but not rental income.
In 2019, the Prima Casa programme received a budget of about RON 2 billion (US$ 464.4 million). It was implemented through fifteen banks: BRD-GSG, BCR, Banca Transilvania, CEC Bank, ING Bank, Raiffeisen Bank, OTP Bank, Banca Romaneasca, Unicredit Bank, Garanti Bank, First Bank, Marfin Bank, Credit Agricole, Leumi Bank, Intesa Sanpaolo Bank.
Rental yields in Bucharest are good
Gross rental yields for apartments in Bucharest are good, ranging from 6% to 6.24%, with smaller apartments having the highest rental returns, according to Global Property Guide research last year.
A 70 sq. m. apartment in Bucharest can be rented for around €550 (US$ 610) per month, while a 120 sq. m. apartment can be rented for just under a thousand euro per month.
Romania is a nation of homeowners, with a homeownership rate of more than 96%. Government policies encourage families to buy their own houses:
- For first-time homebuyers, the government extends a state guarantee of 50% to banks, up to €60,000;
- VAT on properties with an area of up to 120 square metres is reduced to 5%.
Romania’s total dwelling stock was more than 9 million units last year, almost 15% larger than in 2000, according to the National Institute of Statistics (NIS).
Romania´a economy remains robust; but the government’s budget deficit exceeds the 3% ceiling
Romania’s economy remained robust in 2019, registering a real GDP growth of about 4.1%, following y-o-y expansions of 4% in 2018, 7% in 2017, 4.8% in 2016, 3.9% in 2015 and 3.4% in 2014, according to the European Commission (EC).
In January 2020, Romanian president Klaus Iohannis endorsed the 2020 state budget based on economic growth projections of 4.1% this year and cash deficit equivalent to 3.6% of GDP, above the EU threshold of 3%. However, international bodies such as the European Commission and International Monetary Fund (IMF) are more conservative, projecting a 2020 GDP growth rate for Romania of 3.6% and 3.5%, respectively.
However, the country recorded a budget deficit of about 3.6% of GDP in 2019, up from the previous year’s 3% shortfall and the biggest deficit since 2012, according to the EC.
The increased deficit was mainly due to the country’s expansionary fiscal stance. Some of the government’s recent measures include:
- Reduction of VAT from 20% to 19% beginning January 1, 2017
- Elimination of the 1% special construction tax
- Ratification of the unified wage law (UWL), raising all public wages by 25% beginning January 2018
- Lowering personal income tax from 16% to 10%
As a result of fiscal easing, the EC expects that Romania’s deficit will increase further to 4.4% of GDP this year and to 6.1% of GDP in 2021.
In November 2019, the seasonally-adjusted unemployment rate was 4%, slightly down from 4.1% in the same period last year, according to INS.
The total number of unemployed persons in Romania fell to 366,000 in November 2019, down from last year’s 374,000 unemployed people.
Inflation stood at 4% in December 2019, up from the previous month’s 3.8% and above the central bank’s target band of 1.5% to 3.5%. Inflation is projected to ease to 3.5% this year, according to the EC.
On December 2019, the Romanian Leu (RON) recorded a new historic low against the euro, with the exchange rate at around RON 4.7757 per euro. The currency depreciation is mainly attributed to the rapid deterioration of the country’s trade and current account balance and to the growing skepticism among investors about the government’s expansionary policies.
Political uncertainty, widespread corruption
Romania is poised between future and past. Does Romania want to be a modern state, in which politicians are elected on the basis of policies and are prosecuted and imprisoned for corruption? Or does it want to be a clientilist state, in which politics is about who you accept money from?
The two most prominent voices of the progressive future are president Klaus Iohannis, elected in November 2014, and Laura Codruta Kovesi, former head of the country’s National Anticorruption Directorate (DNA).
Iohannis was elected President in November 2014 on an anti-corruption platform. Since Iohannis’ election there have been a series of arrests for corruption, and increased support for the DNA, which has charged or convicted no less 18 ministers from governments that have been in power in Romania since 2004, as well as thousands of lower-level politicians, media moguls, judges and businesspeople.
However progress was set back by the Social Democratic Party’s (PSD) triumph in the December 11, 2016 Parliamentary elections. The PSD’s support is strong among the poor, whose perception is that almost all Romanian politicians are tainted, so why seemingly target the PSD?
The PSD appointed the relatively clean Sorin Grindeanu as Prime Minister. But the real power is the PSD’s Liviu Dragnea, convicted of bribery and ballot-forging during the 2012 parliamentary election and thus barred by law from becoming prime minister. One of the Grindeanu government’s first steps was to pass Emergency Ordinance 13, effectively decriminalising official misconduct in which the financial damage is less than 200,000 lei - clearly a step towards Dragnea becoming prime minister.
This unleashed a storm of popular protest and mass demonstrations. The demonstrations had their effect. Ordinance 13 was repealed and justice minister Florin Iordache resigned, a scapegoat for Ordinance 13.
However on December 2017, a group of PSD senators and deputies submitted another draft bill setting lower penalties for corruption offenses and decriminalizing some of them. Similar to Ordinance 13, the draft bill suggests to decriminalize abuse of office with financial damage worth EUR 200,000 and below, arguing that criminal sanctions should apply only when the damages are "substantial". The bill also propose perpetrators to serve only three years of jail time, and those with severe illness or are over 60 years old to be allowed to serve their sentences at home.
Just six months after becoming a premier, Grindeanu was ousted in a no-confidence vote with the PSD and its coalition partner ALDE in June 2017. Grindeanu was reluctant to resign, accusing Dragnea of seeking to "concentrate all the power in his hands". In June 2017, former Economy Minister Mihai Tudose took over as Romania’s Prime Minister, as designated by President Iohannis.
However in January 2018, Tudose resigned after his own party, PSD, abandoned him in an internal power struggle with the party’s all-powerful chairman Dragnea. He was replaced by PSD’s Viorica Dancila, a former member of European Parliament, who was now Romania’s first woman prime minister.
In November 2019, Ludovic Orban, the leader of the centrist National Liberal Party, took over as prime minister, after the divided and scandal-ridden PSD was overthrown in a no-confidence vote in parliament in the prior month. Orban was tasked to form a transitional government until a parliamentary election is held this year.
- Real estate index (imobiliare.ro): https://www.imobiliare.ro/indicele-imobiliare-ro
- Romanian Residential Market Report 3rd Quarter 2019 (Analize Imobiliare): https://www.analizeimobiliare.ro/Report_Q3_eng_2019/index.html
- Statistics on construction (National Institute of Statistics): http://www.insse.ro/cms/en/content/statistics-construction
- World Economic Outlook Database, October 2019 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?
- Interest rates - RON-denominated loans and deposits (National Bank of Romania): https://www.bnr.ro/Statistics-report-1124.aspx
- Interest rates - EUR-denominated loans and deposits (National Bank of Romania): https://www.bnr.ro/Statistics-report-1124.aspx
- Harmonized Index of Consumer Prices: All Items for Romania (FRED Economic Research): https://fred.stlouisfed.org/series/CP0000ROM086NEST
- Romania Residential Building Permits (Trading Economics): https://tradingeconomics.com/romania/building-permits
- Construction Permits Released for Buildings in November 2019 (National Institute of Statistics): http://www.insse.ro/cms/sites/default/files/com_presa/com_pdf/autoriz11e19.pdf
- NBR Board decisions on monetary policy (National Bank of Romania): https://www.bnr.ro/page.aspx?prid=17336
- Moderate to good rental yields in Bucharest, Romania (Global Property Guide): https://www.globalpropertyguide.com/Europe/Romania/Rental-Yields
- Romania Home Ownership Rate (Trading Economics): https://tradingeconomics.com/romania/home-ownership-rate
- Economic forecast for Romania (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/romania/economic-forecast-romania_en
- Romania’s unemployment steady at 4% in November (Romania-Insider.com): https://www.romania-insider.com/unemployment-romania-november-2019
- Romania´s jobless rate flat at 4% m/m in November (SeeNews): https://seenews.com/news/romanias-jobless-rate-flat-at-4-mm-in-november-682920
- Romania´s inflation speeds up to 4% y/y in December (SeeNews): https://seenews.com/news/romanias-inflation-speeds-up-to-4-yy-in-december-683376
- Romania country profile (BBC News): https://www.bbc.com/news/world-europe-17776265
- Romania´s GDP growth to slow down in 2020 in line with global trend – PwC (SeeNews): https://seenews.com/news/romanias-gdp-growth-to-slow-down-in-2020-in-line-with-global-trend-pwc-682626
- Romania’s President appoints Ludovic Orban as PM – designate (Euractiv): https://www.euractiv.com/section/elections/news/romanias-president-appoints-ludovic-orban-as-pm-designate/
- Prima Casa 2019 programme starts with budget of almost RON 2 billion (Business Review): http://business-review.eu/property/residential-property/prima-casa-2019-programme-starts-with-budget-of-almost-ron-2-billion-197424