Slovakian Housing Market on Road to Recovery

After suffering a housing boom and the effects of the global financial meltdown, the Slovakian housing market is finally showing growth and poised for a significant recovery. See …

After suffering a housing boom and the effects of the global financial meltdown, the Slovakian housing market is finally showing growth and poised for a significant recovery. See the following article from Global Property Guide for more on this.

Things are getting better in Slovakia!  Buoyed by the economic recovery, average housing prices fell only 1.36% (-2.41% in real terms) y-o-y to Q3 2010. House prices are 15.8% down from the peak, the national average price being €1,304 per square meter.

In Bratislava region, prices rose 1.16% (0.09% in real terms) y-o-y to Q3 2010.

Banska Bystrica and Kosice regions experienced house price increases y-o-y to Q3 2010, with price rises of 6.68% and 5.02% respectively. Trencin, on the other hand, had the sharpest drop (-10.18%) over the same period.

The housing boom in Slovakia lasted from 2006 to Q2 2008, with rises ranging from 14% to 35% per annum. The surge stopped in late 2008.  Since then, prices have been dropping continuously. Consumer demand remains weak, and unemployment is expected to reach 14% by the end of the year, up from 9.6% in 2008.

During the 2009 global crisis, Slovakia’s economy contracted 4.7%, a sharp decline from GDP growth of 6.17% in 2008. Thanks to renewed export demand, the economy grew by 3.8% (y-o-y) in Q3 2010, and 4.2% in the previous quarter.

Apartment prices haven’t fully recovered yet

During Slovakia’s property boom, apartment prices rose 87% between 2005 and 2008 (70% in real terms), increasing from €635 per square meters to €1,080 per square meters.

• Smaller apartments (one room units) rose 104% (85% in real terms) 2005-2008, to €1,239 per square metre
• 5-room apartment prices rose 56% (39% in real terms)
• Detached house prices rose 40% (27% in real terms) during the boom years from 2005 to 2008, with average prices increasing from €680 per square meters to €862 square meters.
• Villa prices increased a meagre 25% (14% in real terms).

Prices of smaller apartments fell most during the crash.

Slight improvements have taken place in 2010, although flats (in general) and villas remain weak.

Lower interest rates

Slovakian interest rates gradually declined throughout 2010. By November 2010, average housing loans had fallen to:

• Floating rate, or fixed for up to 1 year: 4.68%,
• Fixed for 1 – 5 years: 4.64%,
• Fixed for 5+ years: 6.18%.

Meanwhile, the ECB repo rate has remained at 1% since May 2009.

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However as a reaction to the crisis, banks have become very cautious in their lending activities.

The economy

Slovakia is one of Eastern Europe’s most successful transition countries. Born in 1993 after seceding amicably from the Czech Republic (the two countries were formerly known as Czechoslovakia), it has a stable polity and liberal market economy.

Slovakia benefited from eight years’ reform under the centre-right coalition led by Mikulas Dzurinda (1998-2004) whose reforms won praise from international organizations, and who oversaw EU and Nato entry.

One of the most famous characteristics of the Slovak economy is its ‘flat tax’ of 19% on income, consumption, and corporate profits, operative since 2004.  “It just works!” explained former minister of finance Ivan Miklos to a Cato Seminar.

The economy’s rapid growth facilitated the country’s membership of the Organization for Economic Cooperation and Development (OECD) and the European Union (EU) in 2004.  In December 2007 Slovakia became a full member of the Schengen Zone, allowing passport-free travel in the 24-member European nations.

Real GDP growth reached an impressive 10.4% in 2007, following 8.2% for 2006, 5% for 2005, and 5.5% for 2004. Kia, Volkswagen, and Peugeot Citroen all have large car plants in Slovakia.

In 2008 there was 6.17% growth, and then a collapse with the crisis to a 4.66% GDP contraction in 2009.

Unemployment was 8.7% in Q4 2008, a significant drop from 19% in 2000. However, unemployment rose again to 14.1% in Q3 2010.

New government – good news for the economy

In the June 2010 Parliamentary elections Iveta Radicova’s centre-right coalition, led by the Slovak Democratic and Christian Union (SDKU), won power from Prime Minister Robert Fico’s centre-left coalition.

Fico’s party had been elected in 2006 on the basis of a populist leftist campaign against the free-market policies of the former PM, Dzurinda. In office Fico realized that he would cripple the economy if he reverted to socialism, and did little. However his government included the anti-Hungarian and anti-gypsy Slovak National Party (SNS) party, led by Jan Slota, whose drunken anti-Hungarian speeches, never disavowed by the government, caused tension with neighbouring Hungary.

New Prime Minister Radicova has made restoring the country´s public finances, under strain as a result of the 2008 global financial crisis, her government´s main priority.

She also promised to return Slovakia to the high growth rates it previously enjoyed.

The new right-wing government will face tough challenges.  Slovakia’s budget deficit rose from 2.19% of GDP in 2008 to 6.77% in 2009.  However the Ministry of Finance expects to cut the deficit to 4% next year and to below 3% by 2011.  The recently approved 2011 budget, aims to cut the deficit to €3.81 billion, from 2010’s €4.54 billion deficit.

Though Slovakia only joined the Euro zone in January 2009, it has already refused to contribute to the €10 billion bailout to Greece. Prime Minister Iveta Radicova has said that overly indebted countries should declare bankruptcy, and not be bailed out.

Yields in Slovakia are unattractive

The decline in dwelling prices since 2009 has been accompanied by an even larger drop in rents, which has brought a decline in yields.

In Stare Mesto, Bratislava’s city centre:

• Gross rental yields on 80 sq. m. and 120 sq. m. apartments were around 4.63% and 3.88%, respectively, according to Global Property Guide research in July 2010.
• Yields on smaller units of 45 sq.m were higher, at 6.73%.

In Bratislava’s less upscale districts (Bratislava II & III), gross rental yields were between 4.57% and 6.30%.

This drop in rents is attributed to increased housing supply around Bratislava. During the last 5 years, around 2,500 to 4,000 units were build each year in Bratislava, according to REAS. Even in 2009, when the global recession occurred, 3,741 dwellings were built.

“Currently the primary residential market in Bratislava is a buyer’s market,” says REAS. However, many fewer completions are expected in 2010 and in 2011, due to limited access to construction loans and also because most developers focus on selling existing projects.

Limited rental market

Slovakia’s rental market is smaller than that of most other EU countries. Only 0.1% of Slovakia’s housing stock is let out by private landlords, mainly concentrated in Bratislava, largely due to the rent control system. Owner-occupancy has risen dramatically from 49.7% in 1990, to 88% by 2008. The share of co-operative housing fell to 7%, and the share of public rental housing to 5%.

Part of the growth of owner-occupation is due to a contractual savings system (Bauspar) that makes it easier for Slovaks to obtain housing loans. This Bauspar system allows borrowers to take loans at lower interest rates, and the government pays an interest premium on the amount saved.

In 2005, the government decreed the abolition of rent control, effective July 1, 2007. However, the decree was never implemented.  Rent deregulation has been postponed repeatedly, as Parliament refuses to deal with the highly sensitive issue.

Slovakia’s mortgage market is small

Slovakia has one of the lowest mortgage-debt-to-GDP ratios in the EU, at 14.95% of GDP in 2009.  Yet despite the downturn, loans for house purchases increased 12.09% y-o-y to Q2 2010, driven by lower interest rates.

In conclusion – the longer term

With the re-election of a sensible free-market government, Slovakia’s now future looks much rosier.  Previously, Slovakia experienced strong growth, peaking at 10.58% GDP growth in 2007. Can this return?  The International Monetary Fund (IMF)  believes the economy expanded by 4.1% in 2010.  The economic outlook for 2011 could be bright – but the housing market will probably stay subdued.

This article was republished with permission from Global Property Guide.


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