Buying property during a recession. Good idea or bad idea?

Buying property during a recession. Good idea or bad idea?

Have you planned to buy real estate in Sofia and are hesitant whether now is the right time?

In this article we will analyze the current situation and try to help you build a comprehensive picture of the real estate market in Sofia at the moment and decide for yourself whether the time for purchase is appropriate.

Since then, on media and social media, when it comes to real estate, the word "bubble" has been speculated. Now in 2020, when a recession is inevitable, for all reasons, many people are asking themselves what will happen to real estate prices. On the Internet, all sorts of "experts" appear, who say that there will be a collapse, others say that there will be a rise, etc.

But what do property prices determine?

Like any other market, prices are determined by supply and demand. It is clear to everyone that when demand is greater than supply, then prices will go up and vice versa. That is, here the right question is what demand is expected to be and what is expected to be supply in 2020.

The search in Sofia

It is easy to say that a crisis is coming, people are registering on the exchange, losing their jobs and this will lead to a big drop in demand for properties. You won't be surprised if we tell you that roughly 2/3 of the buyers in the last 5 years are IT specialists. Tech companies have not stopped working, and many of them as early as January rehearsed the script with work from home and were prepared. The majority of the buyers are also people from the province who migrate to Sofia because of education and professional development. You will not be surprised if we tell you that the people who are employed in the tourist and restaurant business do not represent a serious percentage of the buyers of properties in Sofia. Rather, the owners and managers of hotels and restaurants are a small part of the buyers of properties in Sofia, which are and will be most affected.

Thus, you acquire a vision for the picture of the buyers of properties in Sofia. We also neglected to mention that the trend of returning Bulgarians from abroad is already noticeable, for the first time in decades there is a balance between departing and returning Bulgarians to and from abroad. This is not a precedent, because in Poland in recent years one of the reason the country is developing economically is that the vast majority of people who have lived and worked abroad for a long time have started to return and settle back to their homeland, invest their savings and apply their experience.

The average price of real estate in Sofia is about 1000 EUR per m2. (fakti . bg). This is the lowest price for real estate in the CAPITAL in the EU. Even properties in Skopje (North Macedonia) are at similar, even higher prices: on average about 1100 EUR per m2. (Realigro . bg).

In recent weeks, we've watched trillions of dollars in the global economy. If inflation is not yet felt at the moment, then in about a year the effect will be inevitable. According to bnb data, the bank deposits of Bulgarians exceed BGN 83billion, which is a historical record (several times more than 2010).  Many people still have a clear memory of the collapse of KTB. Also some remember hyperinflation in 1997 and how the savings of many Bulgarians were literally destroyed. At the moment, this scenario is largely non-probable. However, due to the ongoing so-called "printing money" by central banks, inflation will certainly have. Even if it is not felt by most people, then in the medium and long term, those who have savings will feel it most strongly, because ultimately the purchasing power of their money decreases. As complicated as it may seem presented by media and experts, the results are ultimately simple to understand: money that is not invested but stands on deposits loses value month after month and year after year.

By combining the historically high levels of savings in deposits of Bulgarians, with rising inflation and the coming recession (economic crisis) with the fact that investment in real estate has always been the most preferred investment for the Bulgarian and a way to protect the hard-to-earn and saved money, it is possible to repeat what happened after the collapse of KTB, namely: growth in demand and purchases of properties , due to a decline in confidence in the economy and banks and as a tool to protect savings.

As you can see, it's not easy to predict what will happen to demand. The fact is that at the moment the property market is paused, but once we get used to the new virus and press the "play" button again, there are enough arguments that the demand will not decrease, and there are arguments that it will decrease.

But to talk about a collapse in prices and other apocalyptic options is unprofessional and largely a fear-alling one. Why do we think that, keep reading...

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What professional real estate brokers share is that it is now certain: many of the planned new housing projects are being postponed and are not currently starting. Major projects for hundreds of thousands of built-up areas (built-up area) planned for 2020 will be postponeed.

Investors assess the risk of the emerging economic crisis and therefore postpone the start of projects for a period where there will be more clarity. Thus, production of new housing units is stagnant.

Investors who are under construction and started before the state of emergency are largely calm. The supply before this period did not exceed demand anyway, which is why the projects in the construction stage were halved. Thus, these investors are calm, if the pace of sale slows, they are financially insured and do not think about reducing prices.

What will happen to properties bought on credit and people who are out of work and can't cover their contributions? Remember that as a last resort these properties can be rented out for a certain period. Remember that in this market there are also many sellers who have not acquired the property with a loan and who, like financially secured investors, have no idea to sell that even if they lower the price. They simply stop their property from selling, which is already observed and will return it to the market when the price suits them.

There are also a number of other factors that tilt the scales in one direction or the other, and there is hardly anyone who can predict or examine each of them and give an accurate forecast. The truth is, it's still too early to tell.

Is it a good or bad idea to buy a property during a recession, and especially now, in 2020? The answer lies in a basic question that most likely everyone is asking themselves.

If a crisis is going to follow, wouldn't it be better to wait for prices to fall, as happened in 2008?

What is the difference between this situation and the crisis in 2008?

First in terms of the real estate market then and now we need to clear the concept of "bubble". The graph tracks the prices per sq/m of the properties in sq. m. Friendship for the period from 2003 to the present. The graphics for all neighborhoods are identical.

Between 2006 and 2008 the average price per sq.m. from €526 jumps to €933 and this for a period of less than 2 years, while current prices are the result of a smooth rise over a much longer period. Moreover, for the entire period from 2010 to the present, foreign real estate investment is negligible compared to the billions of external investments between 2006 and 2008.  As much as it is speculated that prices are high at the moment, they are still not able to reach 2008 levels, given that earnings have increased many times since then. Quite another is the situation with the labour market, now there are many times more job opportunities. The real estate market in Sofia is not currently a bubble and will not burst to bring down prices. There may be a price adjustment, there may not be, the situation is atypical and unprecedented. There's a crisis coming and companies are going bankrupt, but other companies are prospering. There are people with savings in bank deposits who are also worried because central banks are "printing" trillions and money is being devalued. There may be a drop in demand, but there may be growth. There has been a decline in property production, but it may resume and major projects may start soon.

In conclusion,if you have savings and have reasons to invest in a property or buy a home, then monitor the situation and the market and act if you find a suitable property. Be active because it is possible to make a good deal, which I know how to do if you only read articles from experts on everything.  Even if prices fall for a certain period, they won't collapse. Waiting a year for a 10-15% lower price is not worth it, especially if you pay rent, because it is not certain whether it will happen, but it is certain that your money will be devalued by about 4%-5%. In the long run, property prices rise and money is devalued.

Disclaimer: Delta Analytics Foundation is a registered non-profit legal entity for the performance of public benefit activities. The materials published on the platform are for informational, educational and research purposes only in order to support the mission of the foundation and should not be perceived as specialized advice on real estate transactions. Delta Analysis Foundation is not responsible for the way you use the information contained on the site. Always turn to qualified professionals for financial, legal and other matters according to your specific circumstances and take action based on your informed choices.