Slovenian Housing Market Struggles

The Statistical Office of the Republic of Slovenia reports that the fourth quarter of 2012 was the worst period for the country’s housing prices since 2009, and experts …

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The Statistical Office of the Republic of Slovenia reports that the fourth quarter of 2012 was the worst period for the country’s housing prices since 2009, and experts are blaming the plunge on political strife and protracted economic woes. Prices dipped more than 11% in the last quarter of 2012 when adjusted for inflation, with newly built dwellings of all types taking the hardest tumble. The European Commission reports that domestic consumption is down and unemployment is high, while both Moody’s and Standard & Poor’s has downgraded Slovenia’s banking sector. Although interest rates are improving, analysts are certain it’s not enough to pull plummeting prices out of the tailspin. For more on this continue reading the following article from Global Property Guide

Slovenia’s property market remains in deep trouble, as recession looms and political uncertainty continues. House prices are falling. Transactions are low. Construction activity remains down.

During the year to end-Q4 2012, the nationwide house price index plunged by 8.83% (-11.12% inflation-adjusted), the deepest year-on-year decline since Q3 2009, based on figures from the Statistical Office of the Republic of Slovenia. During the latest quarter, house prices dropped 3.54% (-4.42% inflation-adjusted).

The average price of newly built dwellings fell by 13.5% (-15.67% inflation-adjusted) in 2012 from a year earlier while the average price of existing dwellings fell by 6.07% (-8.43% inflation-adjusted) over the same period.

  • In Ljubljana, Slovenia’s capital, the average price of existing flats dropped 6.35% (-8.7% inflation-adjusted) in 2012 from the previous year.
  • In the rest of Slovenia, the average price of existing flats fell by 8.34% (-10.64% inflation-adjusted) y-o-y in 2012.

Slovenia’s property market is expected to remain depressed in 2013, as economic conditions worsen. GDP declined by 2.3% in 2012, amidst weakening investment, rising unemployment and faltering domestic consumption. The economy is projected to contract by another 2% in 2013, according to the European Commission.

After booming in early-2000s, Slovenia’s property market weakened in 2008 due to the global economic crisis. The following years were difficult, with house prices falling by 0.17% in 2008 (-3.4% inflation-adjusted), by 8.12% in 2009 (-9.15% inflation-adjusted) and by another 0.15% in 2010 (-1.85% inflation-adjusted). In 2011, house prices increased by 1.37% (-1.07% inflation-adjusted).

HOUSE PRICE CHANGE, 2012

 
y-o-y change (%)
change from peak (%)
 
Nominal
Real
Dwellings, Total
-8.83
-11.12
-17.92
Newly built dwellings
-13.50
-15.67
-23.01
Newly built flats
-16.46
-18.56
-23.70
Newly built family houses
-0.13
-2.63
-20.64
Existing dwellings
-6.07
-8.43
-15.23
Existing flats
-7.53
-9.85
-14.37
Existing flats, Ljubljana
-6.35
-8.70
-17.48
Existing flats, rest of Slovenia
-8.34
-10.64
-13.45
Existing family houses
-2.77
-5.21
-17.88
Source: Statistical Office of the Republic of Slovenia

 

Property demand is stagnating. Dwelling transactions dropped 7.9% to 6,336 units in 2012. Dwelling permits issued fell 13.4%. Likewise, the floor space of dwellings authorized dropped 12.9% to 435,719 square metres (sq. m.).

In December 2012, outstanding loans for house purchase increased by just 1.8% to €5.26 billion from the same period last year, according to the Bank of Slovenia.

A vulnerable banking sector

The banking sector is weak and vulnerable. Slovenia’s credit ratings reflect the financial difficulties:

  • Moody´s has recently downgraded for the second time in three months Slovenia´s local­ and foreign­currency government bond ratings by one notch to A1 from Aa3, and placed the ratings on review for possible further downgrade.
  • Standard & Poor´s has placed its ´AA­´ long­term and ´A­1+´ short­term sovereign credit ratings on the Republic of Slovenia on review for possible further downgrade.

Slovenia´s banking sector is dominated by state-owned banks which control more than 40 percent of the market, while France´s Societe Generale, Italy´s Unicredit and a number of Austrian banks are also present. The Bank of Slovenia has said that the Slovenian banks´ financial results in 2012 are expected to be poor and that they will need further injection of capital. The growing risk that a new Slovenian government intervention to rescue the banking sector may be necessary, is one of the main reasons motivating the downgrades.

Recovery fading fast

Uncertainty seems to have spread to the Slovenian housing markets: though the house price index rose 2.13% during the year to the third quarter, according to the Statistical Office of Slovenia (SORS), dwelling prices in Slovenia moved on average 2.4% lower q­-o­-q during the third quarter. Newly built flat prices fell sharply, and newbuild sales went down significantly.

Rents are already going down. The credit rating cuts by Moodys last year pushed up the price of mortgage loans, while the difficulties of the banking sector reduced the banks’ willingness to make loans for house-purchases.

Newly-built house prices are falling:

  • The newly built dwellings price index rose 3.16% during the year to the third quarter, but during the third quarter dwelling prices fell by 4.22%.
  • The price index of newly built flats rose 5.28% during the year to the third quarter, again with momentum falling fast. In Q3 prices fell 5.23% q­-o­-q.
  • The price index of newly built family houses fell 3.24% during the year to the third quarter, also with momentum weakening (prices were 6.37% up y-o­-y to Q1, but 6.48% down y­-o­-y to Q2).

Existing dwellings have been less affected:

  • The price index of existing dwellings rose 1.17% during the year to the third quarter of 2011. In the second and third quarter, prices fell by 0.91% and 0.94% q-­o­-q respectively.
  • The price index of existing flats rose 1.38% during the year to the third quarter of 2011. In Q2 existing flats prices rose 0.54% q­-o­-q, but fell in Q3 by 0.91% q­-o­-q.
  • The price index of existing family houses rose 0.86% during the year to the third quarter. In Q2 and Q3 existing family house prices fell 4.29% and 0.98% q­-o­-q respectively.

Fresh data from the Office of Slovenia (SORS) shows a supply side slowdown. "In comparison with October 2010, the value of construction put in place in October 2011 decreased by more than 25%".

Sales of real estate to foreigners have been limited. From January 2004 to August 2011, foreigners bought only 3775 properties according to the Slovenia Tax Administration (DURS). Most buyers were from United Kingdom (32,8%), Italy (28.9%), Austria (10.9%) and Germany (6%).

Mortgage market is sharply slowing down

Lending for house purchase is rapidly slowing down, as both demand and supply of financing are weak and vulnerable. Monthly data from the EBC show that lending for house purchase was up only 0.2% y-o-y to October 2011, whereas it was up 4% to October 2010. Lending is falling because of worsening conditions on the financial markets and the economic slowdown. Coherently with other economic and financial aggregates, the mortgage market is indicating a likely "double-dip" of the Slovenian economy.

Interest rate movements

The recent dynamic of the interest rates clearly reflects the euro zone turbulence, as the ECB struggle to provide liquidity to the financial system and to restore market confidence. The 8th December the head of the ECB Mario Draghi announced the second cut in the policy rate in three weeks as well as a package of non-conventional monetary measures aimed at injecting liquidity into the troubled European banking system. Now the policy rate is at the historic low of 1%.

The floating interest rate (up to one year initial rate fixation) rose again to 3.88% in October 2011, the highest since August 2009, after the European Central Bank (ECB) increased the euro repo rate by 25 basis points to 1.25% in April. The ten year fixed rate-mortgage rate in October 2011 rose to 6.08% compared with 5.52% in October 2010. However it is unclear interest whether in fact mortgage rates for housing loans in Slovenia will decrease, despite the latest cuts by the ECB.

Struggling economy

Slovenia has been deeply affected by the ongoing eurozone debt crisis, as it is a small open economy dependent on exports. The economy shrank by 2.3% in 2012, after meagre growth of 0.6% in 2011, 1.2% in 2010, and a contraction of 7.8% in 2009.  Slovenia, with a population of about 2 million people, joined the EU in 2004 and the euro in 2007.

The Slovenian economy is projected to decline by another 2% in 2013, as domestic consumption and exports continue to decline, according to the European Commission.

The budget deficit is expected to be 5.1% in 2013, above the EU’s limit of 3%. Public debt is expected to rise to 63.4% in 2014, from 53.7% in 2012, according to the European Commission.

Wages are falling, and unemployment reached 9.6% in Q4 2012. Inflation was 2.7% in February 2013,down from 2.9% during the same period last year.

Political uncertainty

Slovenia’s economic situation has been aggravated by political uncertainty. Prime Minister JanezJansa was ousted by a no-confidence vote on February 28, 2013, amidst economic gloom and banking crisis compounded by allegations of corruption. He was replaced by centre-left opposition leader AlenkaBratusek, the first female premier of Slovenia.

The new government’s priorities will be to “kick-start growth, balance public finances without hampering growth, protecting and developing the public sector and restoring people’s trust in the institutions of the state,” said Bratusek.

This article was republished with permission from Global Property Guide.

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