LM Legal Services Blog

Despite the recent credit boom, Bulgaria still is in one of the last places in EU concerning the number of mortgages per capita, according to the European Mortgage Federation.

In 2008 the total amount of the mortgages in comparison to the country’s GDP is 12%, while at the same time the other EU citizens have taken mortgages to the amount of 6.1 trillion Euros or more than 50% of the total GDP of the EU. In the U.K. and Germany alone this rate is 70%.

This ratio shows how important is crediting for the EU economy. The bad debt is mainly due to mortgages. Mortgage landing has allowed 70.4% of the EU’s citizens to buy property and this ratio is similar to the one of the USA.

Despite the growth of the mortgage market in the last two years, the Bulgarian economy is still not fatally dependent on mortgages. Apart from the very low level of lending from which the boom started two years ago, the other positive factor is the high level of home ownership -  90% of the homes in the country are private property.

At the same time, the largest mortgage market is the U.K. The debt of the Brits to the banks amounted to 1.75 trillion Euros in 2007.

The high level of debt of the European citizens alongside the fact that European banks which have invested in the USA now have “toxic” assets in their portfolios are the major reasons for the growth of the crisis in Europe. The result is stagnation of the credit market – the banks’ requirements are restrictive and the price of the mortgages is high.

According to the European Mortgage Federation, in the last three months only 12% of the purchases of property in Bulgaria have been carried out with the help of a mortgage. In Sofia alone for this period, 34% of the purchases of properties have been at prices ranging from 30 000 to 40 000 Euros for properties with living area of 40-45 sq m, mainly in the less prestigious areas of Liulin, Drujba and Ovcha Kupel.  30% of the purchases of property have been at prices ranging from 50 000 to 70 000 Euros for properties with living area of 45 – 67 sq m  in the areas of Liulin, Mladost and Drujba.  According to the federation the buyers and the developers still can not adapt to the situation of falling prices and still accept prices of last year. This is why between the advertised and the real price of the purchase there is a difference of 10%-20%.  The newly completed properties sell for prices which are up to 15% lower than in 2008. The sharpest drop of prices is of off-plan properties, of prefabricated apartment blocks and of agricultural properties. In such cases in comparison with last year’s prices drop by 40%. The most insignificant reduction of the price is for newly completed properties which have received Permission for Use (Protocol 16).  Only luxury properties have kept their prices from last year and this is only in case that their owners are not desperate to sell.

According to the European Mortgage Federation many estate agencies in Bulgaria will close this year. In January alone between 150 and 200 agencies have closed down. In comparison in Spain in 2008 60% of all estate agencies have gone bankrupt.

The number of the purchases will fall by more than 12% in comparison to 2008, according to analysts. Their number is expected to be about 263 000.

In 2008 the overall number of purchases have decreased by 7.8 % in comparison with 2007, totalling 300 100. According to the Land Registry the total number of new inscriptions in 2007 was 325 385.

Some analysts predict that more than 3000 from the existing 6000 estate agencies will go bankrupt. This means that 7000 people will lose their jobs. It is expected that mainly small estate agencies will close. From the big players, not more than 6% will go bankrupt. The workload of the brokers will fall and their monthly income is expected to be under 300 levs per month.

According to the National Statistics Institute the average area of a property is 63.82 sq.m. and the average price at the moment is 580 sq. m., meaning that the average price of the average apartment is 37015Euros.

The analysts expect that if property prices fall by 14.85%, the market will come back to life. This would mean a price of 493 Euros per sq. m. and 31 518 Euros for the price of an average size apartment 63.82 sq.m.

Despite the financial crisis, the property prices in the suburbs of Sofia have been constantly increasing due to the migration of people from smaller towns and villages who seek employment in the capital. In the last year, more than 30 000 people have relocated to Sofia, while 12 000 people have moved to Varna, the second largest Bulgarian city. The same tendency can be seen in Plovdiv, Russe and Burgas. The newcomers to the cities usually look for cheaper properties in the suburds. As result the prices of apartments in those areas keep rising. The average porperty price in Sofia is 1094 Euros per square metre, while in the county it is 588 Euros per square metre. The studios seem to be very popular and their sales have increased by 17% in the last months. At the same time the demand for one-bedroom apartments have decreased by 28% and of larger apartments by 3%. Most of the sales are of newly built properties.

Office and retail rents fall and will keep falling in the next two years according to Raiffeisen Property. In short term the office space on offer will outnumber the demand. The same tendency is valid for retail space, as only in the next 2.5 years it is expected that the retail space will increase eight times.

Meanwhile the interest of investors is expected to decrease due to the world crisis which has hit the property market. As result the secondary market will become rather active.  Those who bought property as investment will rush to sell it. The demand will be focused mainly in the cities. The prices of high quality residential property will rise in expensive city areas.

In the mountain and sea resorts there are too many properties on offer. In the end of 2007 there were more than 80 000 newly built properties there, while currently there is demand for about 65% of them.

According to Credit Centre the most popular mortgage in Bulgaria at the moment is for a plot of land and a prefabricated house. More and more Bulgarians prefer to move in the outskirts of their cities and to build their own house, rather than to buy an apartment in a block, where two-bedroom apartments are in the same price bracket.

Another new trend is the increasing number of customers who restructure their debt, due to the increase of the interest rate. Many Bulgarians face difficulties repaying their mortgages and some even their utility bills. According to Credit Centre in September each sixth credit has been taken to pay old debt.

In general more than 79% of the mortgages are for the purchase of property and only 1.3% for construction.

Another tendency is that for a second consecutive month the average size of the mortgage has decreased to 43 000 Euros, while during the peak of the property boom it has exceeded 50 000 Euros. Customers freeze their purchase or redirect to a cheaper property. The change is more obvious among the most popular customers – the middle class ones – who used to take a 80 % mortgage for the purchase of one-bedroom apartments. Now these clients are seeking smaller apartments and try to pay a large proportion of the price with their own funds.