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Residential market is gaining momentum in Europe

Accessibility of Own Dwelling in the Czech Republic Comparable to Poland; the Hungarians Must Save Longer.

An average transaction price of a new residential property in the Czech Republic fluctuated around EUR 1,200 per square metre in 2014. The prices of new dwelling in the Czech Republic are 8% higher than in neighbouring Poland (EUR 1,110 per square metre) and even 20% higher than in Hungary or Russia (EUR 960). Although the prices of residential properties in the Czech Republic exceed the prices in other Central European countries, they rank among the most accessible in the region. While in the Czech Republic, it is necessary to save a 7.1 multiple of the average annual gross earnings to purchase a new apartment of 70 square metres, in Poland, you have to count on saving 7.2 annual salaries and even 7.8 salaries in Hungary. These are the results of the fourth annual Deloitte Property Index report, which analysed the development of real estate and residential market prices in 2014 in 15 European countries, Russia and Israel. 

In the European comparison, the accessibility of dwelling remains slightly below the average in the Czech Republic. The most accessible dwelling can be found in Belgium where an average citizen only needs a 3.2 multiple of their gross annual salary to purchase their own real estate. With a 3.3 multiple, our Western neighbours, the Germans, are at the top of the ranking. On the other hand, citizens in the United Kingdom need to save up to 10 annual salaries on average to buy their own dwelling, which means the last place in our survey among European countries.

Accessibility of own dwelling generally depends on the economic advancement of countries. The higher the country’s economic level is, the more accessible own dwelling is found there. The United Kingdom is rather an exception, which proves the rule. High prices of real estate in the United Kingdom result from the great interest of foreign investors in this market

As usual, the development of real estate prices in individual countries significantly varied in the year-on-year comparison. The highest year-on-year increase was recorded in Ireland (a 31.7% increase), Israel (25.6%) and in the United Kingdom (21.6%). The prices of real estate in Spain increased by 10.5%, following a sharp drop in 2014. The most significant decrease in the price per square metre was caused by the depreciation of the rouble against the euro in Russia (a drop of 16.6%).

The spread between the offered and final transac­tion price serves as an important indicator indicating the equilibrium between dwelling demand and supply. The highest discount was detected in Spain where buyers receive on average, when buying an apartment or house, a (-20%) discount. However, the discount is lower than the last year, which indicates improving conditions on the housing market. Other markets show a typical discount of under (-10%). 

In 2014, the average transaction price of new real estate in Prague amounted to EUR 2,020 per square metre. The prices of real estate in Prague exceed those in Warsaw by 13% (EUR 1,760) and are even 41% higher than in Budapest (EUR 1,190).

Of larger European cities, the lowest prices of living are in Porto (Portugal) where the average price per square metre amounted to EUR 860. If you are looking for a good value, Porto might be exactly the place for you. On the other hand, the most expensive cities are Inner London and Paris, with EUR 14,090 and EUR 10,270 per square metre, respectively.

Based on the data on the Czech Republic included in the Transaction  Prices Map, the price of a new apartment in Prague remained similar as in last year. However, prices in some other European cities even grew at a two-digit pace. The prices in Inner London increased by 32% and in Dublin even by 34%. The question is whether this growth rate of prices in the respective cities is sustainable in the long term and whether we are not at the beginning of a new real estate bubble.

The indebtedness of households rises

Indebtedness of households (i.e. the proportion of residential debt to household disposable income) is one of the determinants of house price growth.

The lowest level of indebtedness of households can be found in Russia with 6.5% of residential debt to household disposable income. Countries with a low level of indebtedness are the Czech Republic, Hungary, Poland, Italy, Israel and Austria, with residential debt to household disposable income of under 50%. Consequently, these countries have the highest potential of house price increase as a result of overall better financing conditions and following increases in mortgage lending. The highest level of indebtedness can be found in Sweden, Denmark and the Netherlands with residen­tial debt to household disposable income of above 150%. 

Good financing conditions for residential projects are important for stability and health of the residential real estate market

The lowest interest rates of loans for developers are in Belgium, Austria, Germany, France, Sweden and the Netherlands, due to the low-risk profile and strong real estate market in these countries.

Pre-sales, which are necessary for gaining the funding of development projects, vary significantly among the surveyed countries, being the lowest in Portugal (10%), Poland and Spain (25%) and the highest in Hungary (55% and Italy (60%). The requirements of banks for investments of the developer’s equity are comparable in Europe. In general, banks request that developers utilise equity to fund no more than 40% of the value of the development project. The lowest value of equity is required in Denmark, Ireland and Russia (20%) and highest required values were recorded in Hungary and the Netherlands (40%).

Residential on the rise

Europe’s residential markets have become its strongest performing real estate sectors over the last decade, even though there have been significant differences in return and the drivers of performance between countries and local markets over this period. Each residential market has its own specific market structures and fundamentals as well as historic trends. On the one hand there are common conditions affecting the whole of Europe, especially in the Eurozone, such as the ECB policy on key interest rates. On the other hand specific factors drive economic fundamentals in each country and thus its residential markets.

Geopolitical risks are still present and the global outlook is clouded by the possibility of macro-economic trends diverging further. Financial market volatility is also a threat to the European economies. Europe could be facing an era of low growth, low investment, low inflation and volatile financial markets. The European Central Bank (ECB) is attempting to battle this scenario and has supported the economy by starting quantitative easing early in 2015. As of the latest data, it seems that the financing institutions have reacted positively with a decrease in credit standards. This should help enterprises and investors in further growth.