Research: The Real Estate Market in Serbia - The Future?

A significant decrease in the number of real estate transactions by 25% compared to last year was recorded in the first quarter of 2023, according to statistical reports. Currently, based on our analyses, the decline is more pronounced in the secondary housing segment, while in the new construction segment it is more moderate. After conducting analyses, a pessimistic atmosphere has settled in the real estate market, raising many questions: is there a decline in demand, when can we expect a decrease in real estate prices? These are just some of the questions we received answers to from Miloš Mitić of Cityexpert.

A period of calm in the market

After years of market growth and record-low interest rates, we have entered a period of calm in the market, caused by several factors. The COVID crisis, high inflation, and recession have all impacted the economies of all countries, including the real estate market. Due to high inflation, the European Bank is implementing strict monetary policy measures, leading to an increase in Euribor and mortgage interest rates (the interest rate includes Euribor and bank margins). Along with these measures, Euribor, which had been at a record low for a long time, turned positive in the first quarter of 2022 and has been rising for a whole year. This significantly affects loan repayments and, consequently, reduces demand from buyers financing their purchases with mortgages. Although the share of apartment purchases financed by mortgages has never exceeded thirty percent of the total transaction volume, this picture has changed even more over the past year, with the share dropping to around 20%. The continuous decline in demand from credit buyers last year has been accompanied by an increase in purchases financed from personal funds, as many people see real estate investments as a good way to preserve their money and its value through property. It is important to note that, despite the significantly lower share of mortgage financing compared to self-funding, the substantial decrease in demand from these buyers has a significant impact on the overall market picture. Why is this happening? Because Serbia is a market of linked transactions, so one credit buyer is often accompanied by several cash purchases. For example, I take out a loan and buy property from person X, who then becomes a cash buyer. The 2008 crisis: Differences in sources of problems and vulnerability of the financial sector.

When we talk about the real estate market, everyone anxiously recalls the 2008 crisis, which significantly changed the real estate market and parts of the financial system in various countries. Can we now talk about a similar scenario, or is this a completely different crisis? First of all, it should be noted that parts of the financial system, primarily banks, are in a much better position today than they were in 2008 when they were less capitalized. That crisis was related to problems in the banking system, such as lack of awareness, poor assessment of the structure of credit products, excessive mismatch of repayment terms, and large off-balance-sheet liabilities, among other issues. Today, the vulnerability lies not so much in the financial sector as in the real economy. A significant difference between these two crises is the source of the problem. The 2008 crisis was triggered by the bursting of the housing bubble in the United States, which led to a sharp decline in housing prices, which, in turn, resulted in a decrease in the value of mortgage bonds. Later, these effects spread to Europe. This led to significant losses in the banking sector, resulting in a serious credit crisis that affected the global economy. Both crises highlighted the importance of financial stability and the need for governments and regulatory bodies to be vigilant regarding the financial sector to prevent future crises.

The impact of inflation, monetary policy, and geopolitical crises on the sale and rental of real estate.

Real estate, as one of the segments of the economy, is sensitive to the influence of various market factors. Currently, the most significant influences are inflation along with a restrictive monetary policy, which has led to an increase in interest rates. Additionally, we are also experiencing the parallel impact of the Russian-Ukrainian crisis, which has altered both the sales segment and the rental segment in the Serbian market. While all these factors have led to a decrease in demand for sales, on the other hand, they have significantly affected a substantial increase in demand for rentals and, consequently, on apartment prices in this segment. It is very important to note that here in Serbia, we are talking about "imported" inflation, which has significantly increased the cost of the consumer basket, serving as a clear trigger for the decline in demand for purchasing apartments. These market changes, although they generally pertain to the economy of the entire country, can be viewed through the lens of several cities and two distinct segments: new builds and secondary housing.

New build or secondary housing?

In the previous period, we saw a price increase across the country, with the highest growth noted in the three largest cities: Belgrade, Novi Sad, and Niš. If we look at Belgrade, which is generally the most in-demand, we are talking about average prices for new builds ranging from 2,500 to 5,000 euros in the central areas and from 1,000 to 2,000 euros on the outskirts. Prices for new builds are slightly higher than for secondary housing, which has influenced the market demand to be more focused on new builds; primarily because new builds often meet the needs of modern buyers (they have garages, new elevators, etc.), and first-time homebuyers receive a VAT refund, which is an important factor. Additionally, we can talk about the rising cost of materials and difficulties in finding suitable craftsmen when it comes to secondary housing and apartments that require renovation. Of course, it should be noted that secondary housing also has its advantages; often in central areas, secondary housing is the only option available, and the architecture and designs of secondary housing have their own target audience. In Novi Sad, prices in the central parts of the city range from 2,500 to 3,500 euros, while on the outskirts, they range from 1,000 to 1,600 euros per square meter. According to statistical reports, Novi Sad has seen the largest decrease in the number of sales transactions in the first quarter, with a percentage drop of about 30%. Niš has also experienced a clear decline in demand, leading to a decrease in the number of sales transactions in the first quarter. In terms of prices in Niš, they range from 1,900 to 2,400 euros in the central parts of the city and from 1,000 to 1,400 euros on the outskirts. In Belgrade, as well as in Novi Sad and Niš, there is a clear trend of declining demand caused by all the aforementioned factors, but there is still no trend of decreasing prices!

The unpredictability of the financial crisis and the potential decline in real estate prices

Prices are currently experiencing a slight decrease or are at last year's level, with the difference being that if the trend of declining demand continues, a certain adjustment in real estate prices will be inevitable. The nature of the financial crisis is that