At the end of November, the Vice Governor of the Bank of Slovenia, Primož Dolenc, stated that: “real estate indicators indicate that the prices of residential real estate in Slovenia are overestimated”.
What does this mean and how do they calculate it?
“The Bank of Slovenia calculates indicators of relative overvaluation. Relative overvaluation indicators are calculated by comparing the historical dynamics of average real estate prices in Slovenia with respect to income trends (or other macroeconomic data). This means that in absolute terms we cannot claim that real estate prices are currently overestimated by five to ten percent, but that their deviation from the historical dynamics of some indicators is five to ten percent,” the Bank of Slovenia explains.
One of the main indicators is the number of salaries for 60 square meters of housing
In the latest report on financial stability, the Bank of Slovenia wrote: “The ratio between the average price of a second-hand apartment in Ljubljana (60 square meters) and the average annual net salary is around 12 annual net salaries. Nationwide, this ratio is eight annual net wages. The difference between the two indicators was the largest in 2007 and 2008, when the purchase of an apartment (60 square meters) in Ljubljana had to deduct about five average annual net salaries more than the purchase of an apartment in Slovenia. On the other hand, this difference was the smallest in 2013, around three average annual net salaries.”
Will prices continue to rise?
Of course, the Bank of Slovenia’s finding that real estate is overvalued does not mean that prices can no longer rise or will fall. It is quite possible that they will continue to grow. Just to illustrate: if we compare prices with the “balloon” years of 2007 and 2008, we come to an interesting conclusion. Nominal residential real estate prices exceed the 2008 peak, while real prices are still around ten percentage points lower.
There are at least three arguments for further price increases:
1. There are still too few offers, especially in Ljubljana.
2. The cost of building materials is growing.
3. Investment aspect. Despite the fact that renting out real estate is not considered very profitable, the Bank of Slovenia’s latest report on financial stability states: “Due to the greater difference between the interest rate on long-term deposits and the return on rent in relation to real estate prices in recent years, there is a tendency that real estate prices will continue to rise in the future.”
But what is the main point that could turn the real estate market upside down? Central banks. “The ECB’s monetary release policy will be decisive in housing prices. When the turnaround takes place, we can expect a marked decline in prices in the short term. Such a turnaround is expected in two years or even sooner,” said economist Velimir Bole.
The latest data from the Bank of Slovenia show that loans to the non-banking sector, i.e. households and companies, increased by EUR 81.8 million in September, which is a tenth more than this year’s average for the first eight months.
As much as 66.9 million of the total increase in loans were housing loans, while companies borrowed “only” 29.8 million euros. “The growth of loans to households has been gradually increasing since the end of the first quarter of this year, when it became positive, reaching 3.2 percent year on year in September. The increase in loans to households is mainly due to the increase in housing loans, which grew by 8.1 percent in September. This year’s average increase in housing loans – 48.7 million euros – is more than twice last year’s,” the report reveals.
Where are we currently?
Prices, as we know, are determined by supply and demand. Currently, it seems, there is more demand in the real estate market than supply. And this despite the fact that prices in Ljubljana are more than 50 percent higher than five years ago. Where are we with the prices? Realistically, therefore, given wage growth, it is still below the (bubble) peak of 2008, a quote from the Financial Stability Report. Will the prices fall if the Bank of Slovenia finds an overstatement? Certainly not because of their findings alone.
How does the Bank of Slovenia even determine overestimation? As we said, one of the important indicators is the ratio between the average price of a second-hand apartment in Ljubljana (size 60 square meters) and the average annual net salary. In short, how many annual salaries do you have to spend on buying a 60 square meter apartment in Ljubljana. But this information can also show a slightly distorted or even wrong picture. Let’s see why.
What does the average salary actually mean in Slovenia today? Is it really as calculated by Surs, or is this information perhaps out of place? How many employees at d. o. o. receive a minimum (or slightly higher) salary, but in reality their income is much higher because part of the salary is “corrected” through travel expenses or other detours? How much do sole proprietors contribute to the vague data?
They are not in any wage statistics, but the “net income” in this category can be quite high in many cases. How to determine, for example, the average salary of a professor? In addition to his regular salary, he can earn almost 50 thousand euros a year tax free. But beware, these 50 thousand are not in the statistics, and his income is significantly higher, and with it his potential for purchases, for example in the real estate market. Of course, it’s not just professors, standardized espies have spread across all branches, at the end of September this year, according to AJPES, we had almost 105,000 “sole proprietors” in Slovenia, which means 22% growth compared to the same period five years ago.
Another finding shows that something unusual is happening in the real estate market. If we cross the data from the databases on concluded real estate transactions with entries in the land register, we can find that a significant share of real estate is bought “on cash”, i.e. without a loan (we do not have an exact number). Part of this money probably comes from inheritances, part from profits generated in capital markets or cryptocurrencies, part from Covid allowances that some have received in the last two years. For part of the money, one could speculate that it comes from the low-tax revenues of standardized sole proprietors.
Of course, real estate prices are rising or inflating due to cheap money, not only in Slovenia, but also elsewhere in Europe. However, if at the same time we find that many real estates in Slovenia are bought without loans, they may be raised by something else.
This is not an advertisement for further growth in property prices. This is a reflection on the fact that there may be something wrong with Slovenian statistics. And that, after all – when the parliament is currently deciding on tax reform – there is something wrong with the Slovenian tax system and taxation.