Will the balloon burst?

Will the balloon burst?

Real estate prices in Serbia have been on rise for several years now, and we are wondering if they will collapse again like in 2008.

In order to provide an adequate answer to this question, we need to look at the whole macroeconomic context. First of all, the rise in real estate prices over the last couple of years, after a long period of stagnation, cannot be classified as a bubble. It is actually a long-awaited appreciation, after a period of depression. Putting the market back on track.

Rising real estate prices throughout history are not new. If we look only 50 years back, we see that their value is constantly increasing, of course through cycles. And this is not an isolated case. The Consumer Price Index has been rising throughout history, or we can say that absolutely all prices have been rising accord to inflation rate. Why would the real estate market be an exception? It's normal for prices to go up. Judging by this information, we have nothing to fear.

However, there are certain risks that we need to monitor. First of all, we need to be aware that all major investments in Serbia are happening with foreign investors' or foreign banks' money. That means we can't do much about it locally, except to offer a steady local currency. That is why we need to go to the source of events. On the European Union market, we can identify two main risks. The first one is the possibility of a violent BREXIT, and the second one is the technical recession of the German economy. Although all of this is far away from us, it can still greatly affect the Serbian market. It is expected that in the event of a disturbance in the EU, foreign investors and banks will immediately withdraw money from our market in order to compensate for losses in their home and / or primary markets. If that happens, all we have to do is looking at it. However, the Queen of England has blocked parliament with the intention of leaving the EU without agreement, reducing the risk of market crashes, violent currency readjustments etc. The German economy was in a technical recession in July 2019, but only 0.1% We saw similar situation in 2018 and 2015. It is clear that the German economy will not stop from one quarter in minus (if it can even be called a minus).

It would seem that everything is under control.

However, there is one thing that could affect the overall real estate market. It is a continuation, or better deepening of the quantitative easing. Negative interest rates were introduced in the EU for the first time in 2014, and since 2015 it can be said that they have not returned in plus. Moreover, the European Central Bank has a tendency to deepen the minus, in order to finally force banks to transfer this effect to the market.

And this is exactly what is happening. More and more European banks are shifting the pressure of negative interest rates on their clients. To simplify - clients who deposit money in the bank, instead of getting the interest, are now charged for safekeeping. This trend is threatening to significantly outflow deposits from banks ... And we know that, after a bank, real estate is the safest investment.

This is the current trend of the European market, but we can remind you that even Slovenia, practically our neighbor, is considering introducing negative interest rates on deposits. It is certain that such a novelty can be expected in Serbia in the near future. When that happens, we will witness the overflow of money from banks to real estate market, which will further drive prices. Then we can talk about entering the bubble, as artificially generated demand will cause additional price increases.

It is a process that lies ahead. Only when this process is completed or inverted, we can expect a significant reduction in real estate prices.

You just have to keep track of when the music will stop.

 

Dejan Ili?, CFO in West Properties

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