site.btaBank Warns of Significant Imbalances on Sofia Housing Market

The latest report on housing affordability prepared by the UniCredit Bulbank warns of significant imbalances in housing prices in Sofia. The report was presented to the media on Thursday by the bank’s chief economist, Kristofor Pavlov. The report looks at the trends as of the third quarter of 2023.

It shows that a middle-income household had to save its gross earnings for 6.7 years, to be able to afford an average apartment of 81 sq m in 2022. This is a moderate deterioration from 2021, when the Bulgarian average house-prices-to-income ratio was 6.1.

The significant inequalities in housing affordability between large and medium-sized cities persist. Sofia remains the most unaffordable city for housing, as less than 10% of the highest-income households could afford to buy a home in 2022. In the cities of Plovdiv and Varna, housing was affordable for only 10% of households.

In 2023, a double-digit price-to-income ratio is found in 35% of all neighborhoods in Sofia. This is a slight increase from 2022, when the share of neighborhoods with double-digit ratio was 31%. These figures suggest that there is a significant share of locations with overpriced housing in 2023.

The share of locations with double-digit price-to-income ratios was close to zero between 2013 and 2015, and it was during that period that prices in Sofia were close to equilibrium.

And yet the authors of the report say that there is not yet a housing market bubble in Sofia. They assume that a housing bubble exists when more than half of the housing is extremely unaffordable (according to a four-level scale), meaning that households must be saving their gross income before taxes over a period of more than 10 years to buy an average home in that market. Thus, they conclude, there is no housing bubble in Sofia. They, however, note that the imbalances in housing prices in the capital had become significant by the third quarter of 2023.

The authors of the report say that housing prices in Sofia must fall by 47% in order to bring the market back to equilibrium, provided that incomes remain unchanged. Conversely, if housing prices remain fixed and the entire transition to market equilibrium is made only by increasing incomes, the latter would have to rise by 89%. Considering the pace of income growth in Sofia over the last five years, such an adjustment would take nearly a decade, experts say.

Over a period of seven years, price rises of more than 100% have been seen in the largest cities of over half a dozen European countries: Hungary, Czechia, the Netherlands, and Portugal, as well as in the Baltic states. Prices have risen by 70% to 100% in some of the largest cities in Slovakia, Slovenia, Austria, and Germany. Against this background, the growth of 94% reported in Sofia seems significant, even though the low starting level of housing prices in the Bulgarian capital in 2015 can be considered a mitigating factor, Kristofor Pavlov said.