Blatant housing speculation in 2024. How developers are forcing prices amid high demand

In recent years, the real estate market in Romania has registered strong variations from year to year, but always under the sign of inflation and speculation. In the first months of 2024, the criteria for judging the economic health of this sector offered conflicting interpretation data.

On the one hand, the volume of operating permits granted for residential constructions was in decline, while in the first quarter of 2024, the asking prices for housing, at the national level, registered an advance of about 8% compared to the similar interval in 2023 Basically, investors and builders are more skeptical about expanding their portfolio, people have started to recover financially after the period of decline in demand in recent years, after the pandemic, so prices are higher than ever.

Building permits, in decline

According to data published by the National Institute of Statistics (INS) for the first quarter of 2024, a reduction of 7.2% is observed compared to the same period in 2023, indicating potential strategies of real estate developers to support high prices by restricting supply. Practically, the real estate market in Romania shows a notable decline, especially judging by the volume of construction permits granted for residential buildings.

According to the INS, in the period January-March 2024, 7,422 authorizations were granted for the construction of houses, decreasing compared to the first quarter of 2023. This downward trend is present in most developing regions of the country, except for the areas of South-West Oltenia and West, which recorded modest increases. Specifically, in March 2024, although there was an increase from February, compared to March 2023, the number of building permits for residential decreased by 9.2% and the total usable area suffered a reduction of 16%. Thus, a slowdown in residential construction activity can be observed, which could influence the availability and prices of housing in the long term, according to the INS.

The decline in the number of building permits can be seen as a tactic by developers to limit the supply of new housing in order to support or even increase prices in the housing market. In a scenario where demand is relatively flat or increasing, supply constraints can put upward pressure on property prices, making it more difficult for potential buyers to purchase homes.

The strategy of keeping prices high by restricting supply can have negative repercussions on the affordability of housing for the population in the long term, especially considering the demographic beach consisting of young people wanting to own a property.

What the market specula means, in numbers. Rising demand coupled with falling supply fuel high prices

According to data analyzed in April by a well-known real estate platform based in Romania, in the first quarter of 2024, the asking prices for housing, at the national level, registered an increase of about 8% compared to the same period in 2023, the average reaching 1,563 euros/useful square meter. The analysis shows that the owners in Brașov and those in Iași are less willing to let the price go than those in Cluj-Napoca or Timișoara: if in the first cities we are talking about a negotiation margin of 2.4%, in the two large regional centers in the west of the country it reaches 3.5%, reports Economedia.

According to the quarterly analysis, compared to the same period last year, transactions continued to grow (+5.4%), and the demand for residential properties is heading towards the level of good years (+3%), at the expense of rents.

The most expensive city for buyers remains Cluj-Napoca. Here, the average asking price for homes put up for sale reached 2,631 euros/useful square meter in the first quarter. Brașov occupies the second position in the national ranking with an average of 1,789 euros/useful square meter, while Bucharest is only in fifth place with 1,578 euros/useful square meter.

“Owners and developers are not willing, most of the time, to make significant discounts, either because of their own costs or because they have a certain emotional attachment to the home in question. Of course, we are not discussing here special situations such as those in which we want to speed up the sales process or those in which we are discussing packages intended for investors, which include several properties”, according to the data analyzed by the real estate platform, according to the cited source.

The negotiation margin – calculated as the percentage difference between the transaction price and the buyer’s last asking price – is actually quite small in the main cities of the country. Owners from Brașov and Iași, for example, are less willing to let the price go than those from Cluj-Napoca or Timișoara. If in the first cities we are talking about a negotiation margin of 2.4%, in the two largest regional centers in the west of the country it reaches 3.5%, the quoted source says.

The cited source also shows that the only big city where the offer for sale increased at the beginning of the year was Brașov. Buyers had 6,100 homes and apartments to choose from, 2% more than at the start of last year. At the opposite pole was the Capital, where the supply of housing decreased by almost 20%. Even under these conditions, Bucharest has no rival at the national level. Out of a total of 88,900 houses and apartments listed for sale in the six largest cities in the country, more than half were in the Capital.

The analysis of the real estate platform thus validates the speculation scenario from real estate developers: “With the return of demand, real estate prices are increasing. Further, additional pressure is generated by the decrease in supply, which not only can, but certainly will put pressure on prices, especially as the long-awaited moment of interest rate cuts is near. These things, combined with the unbridled appetite for owner status, risk keeping uneducated buyers in the zone of compromise developments – in terms of quality, location, areas – and many and cheap suburban projects, whose value is not only it will not grow over time, but will remain absolutely derisory. Beware of the price compromise! The capital is full of such examples which, by the way, largely explains why Bucharest is overtaken by Cluj-Napoca, Brașov and soon by all the secondary cities, although it has entire neighborhoods with an average price of almost 3,000 euros/sqm” , said one of the representatives of the company that conducted the study.

Market consultants are optimistic, betting on an increase in investment in 2024

According to the Deloitte Real Estate Confidence Survey for Central Europe 2024, published at the end of April, half of the real estate companies in Central Europe (49%) foresee an increase in investment this year, while only 19% expect a decrease. According to the release issued by the consulting company Deloitte, 40% of respondents anticipate an increase in market activity in 2024, compared to only 15% recorded the previous year. Also, the proportion of those predicting a decline in activity fell to 16%, compared to 57% in 2023.

Real estate investors intend to focus on new projects (31%) or raising funds for future investments (19%). One in three investors expect their portfolio performance to improve, with twice as many predicting a deterioration. At the same time, the industrial sector remains the most competitive (31%), followed by the residential sector (21%), according to the Deloitte study.

As far as developers are concerned, an important trend for 2024 of re-profiling towards other market segments can be seen. A quarter of them are considering such a change, especially office and commercial space developers. Three quarters of them will focus on other sectors this year, mainly mixed-use assets or residential projects for rent, Gazeta de Cluj cites.

The Deloitte analysis also revealed that in Romania, transactions in the office market have been tempered since 2023, and the focus has been on the renegotiation of rental contracts and the flexibility of clauses. In terms of retail projects, the local market is differentiated by the existence of a large number of projects and an increased appetite for investment, stimulated by the prospect of reducing inflation and increasing the purchasing power of the population. The industrial segment benefits from growth prospects, considering the geopolitical situation and the phenomenon of relocation of various production units to politically allied countries.

However, between real estate investors and developers reshuffling to protect their profits and keeping prices relatively artificially high by controlling supply amid this year’s revitalization of demand, the market appears to have a dim outlook for a potential lower prices per square meter for buyers.

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