Slovenia’s membership in the European Union (EU) is causing more harm than good as the debt crisis causes a chill in the country’s housing market. Moody’s has lowered the country’s bond rating and Standard & Poor’s is reviewing its credit rating for further downgrade which, combined with weaknesses in the new political regime, is expected to have a negative impact on state-owned banking and lending strength. Slovenia’s GDP grew by 1% in 2011, but analysts suspect the momentum will not transfer into the real estate market as lending slows despite historically low interest rates. For more on this continue reading the following article from Global Property Guide.
The conservative candidate Zoran Jankovic, a former major of Ljubljana, won a narrow victory in the Slovak Republic’s presidential elections on December 2011 over the "Democrat" Janez Janša. But the new president will struggle to rule effectively, given his thin support in parliament, according to Osservatorio Balcani e Caucaso (OBC), an NGO monitoring Balkan politics.
As a eurozone member, Slovenia´s housing market is also likely to suffer from the the euro’s crisis and possible eurozone recession. Until the euro crisis heads towards a real solution, uncertainty is likely to be the main driver.
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.
An OECD survey of Slovenia in 2011 suggested that the Slovenian banking sector in 2008 appeared to be relatively inefficient when compared to other European countries.
According to the European Bank of Reconstruction and Development (EBRD) the banking sector remains at risk because of weak growth and an uncertain funding environment in the European banking markets. Moreover "the government should reduce its direct involvement in bank decision-making, withdraw guarantees and plan for the privatization of state-owned banks".
On 26 October 2011 the European Council agreed on measures to restore stability and confidence in the banking sector. The European Banking Authority (EBA) prepared policy measures, which require that banks strengthen their capital position by the end of June 2012.
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 qoq during the third quarter. Newly built flat prices fell sharply, and newbuild sales went down significantly.
The Slovenian market is suffering from macroeconomic and financial uncertainty and this is particularly true of newly built houses:
- The newly built dwellings price index rose 3.16% during the year to the third quarter, but momentum is strongly down (price rises were 8.08% up yoy toQ1, 5.64% up yoy to Q2. In the third quarter dwelling prices fell by 4.22%, qoq.
- 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% qoq.
- 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 yyoy to Q1, but 6.48% down yoy 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% qoq 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% qoq, but fell in Q3 by 0.91% qoq.
- 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% qoq respectively.
In conclusion the recent downward price momentum is much more evident for new dwellings, than for existing houses and apartments.
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%).
The slowdown in the Slovenian housing markets may be explained by the uncertainty surrounding the future of the common currency as well as the vulnerabilities treating the national banking sector. Investors may tend to postpone their longterm decisions to the longawaited common solution for the eurozone crisis. The bear trend might be reversed, or get worse in 2012 – it depends on the prospects of the eurozone as a whole.
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 rates likely to fall
On 8 December the new European Central Bank (ECB) head Mario Draghi announced a policy rate cut, the second in three weeks, setting the interest rate at a historic low of 1%. He also approved a package of nonconventional measures injecting liquidity into the European banking system.
Mortgage interest rates in Slovenia had previously been trending up, with the floating interest rate (up to one year initial rate fixation) at 3.88% in October 2011, the highest since August 2009, and the ten year fixed rate at 6.08%. However interest rates could fall, following the latest ECB cuts.
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 this trend might soon be reverted and interest rates decrease again, following the latest cuts by the ECB.
Growth likely to be weak
Slovenia’s economy grew by 1% in 2011, and is expected to grow by 0.3% in 2012 and 0.8% in 2013 (OECD forecast November 2011). The budget deficit should progressively decrease from 5.3% in 2011, but the economy is very weak:
- Private consumption has not yet recovered from the aftermath of the financial crisis, and is expected to stagnate with 0.1% growth in 2011, 0.2% in 2012 and 0.8%.
- Unemployment is expected to be 8.1% in 2011, up from 5.9% in 2009 and to rise to 8.5% in 2012.
The bleak outlook depends on the combination of weak external environment, and a deleveraging corporate sector, say OECD economists. Activity should recover gradually in 2013 as confidence recovers.
In summary, the Slovenian housing market, after a rebound, is now rapidly cooling. The main driver of this renewed slowdown is the intrinsic fragility of the banking sector, exacerbated by the euro storm and the likely recession in 2012. The prices of newly built houses show a worse trend then those of existing dwellings. Transactions are stagnating as the economy worsens, and lending for house purchases are also rapidly slowing.
This article was republished with permission from Global Property Guide.