A few months ago, the financial crisis which broke out in international markets still seemed rather remote to most CEE markets, Romania included. Although its influence upon development of this part of Europe was not infrequently commented as a driver that might only exert a slight impact on dynamic growth of local economies, no-one would have expected so severe consequences to appear, though. Over as short a period as a few weeks, capital involved in investments, stock exchanges and inter-bank capital started dwindling rapidly, adversely affecting the entire region's economy. For instance, over as short a period as two months, the Bucharest stock-exchange index depreciated by circa 40%. The crisis will no doubt affect the Romanian housing market as well, both on its buyer and developer side, which will be reflected in dropping turnover rates and decreasing activity of players on both sides of the marketplace - i.e. the demand and the supply.

Demand

For several months now, a significant decrease could have been observed in speculative and investment purchases in the Bucharest market, which has materially translated into the number of transactions entered into in the primary market. In most residential projects, the sales have decelerated considerably, and the progressing financial crisis may seriously contribute to deepened slowdown through a series of financial mechanisms. One material factor being a direct consequence of the crisis is availability and development of mortgage-secured loans market. Development of this particular market was clearly decelerating in the last quarter and will certainly not achieve in the nearest period dynamism close to the one observable in late 2007/early 2008. One reason for this phenomenon is increasing cost of credit, as combined with large fluctuations in the foreign currencies market, as observable recently. The reference rate of the Central Bank of Romania increased within as short as three quarters of a year to 10.25%, up from 7.5%, thus increasing the cost of credits or loans drawn by residential unit buyers. Foreign-currency lending has grown dearer also due to depreciation of the domestic currency against foreign currencies, to name e.g. the euro, and albeit the present-date RON/EUR rates are not materially different from those of the beginning of 2008 - yet, in June 2007, EUR 1.00 could still be bought at RON 3.13, whilst the present-day rate is RON 3.74/EUR 1.00 (as at 28th Oct. 2008). For a household repaying a loan at e.g. EUR 600 per month, this may stand for the instalment growing up to RON 366 on a month's scale, without the interest rate growth taken into account. Viewed against a probably decreased growth trend in salaries, as a consequence of tough economic conditions under which several enterprises and businesses will be doomed to operate, it can be expected that availability of cheap housing loan facilities, being so important to development of residential markets, will to a material extent determine the strength and scale of demand in the local residential market. Postponing by prospective purchasers their decision to buy, based on their expectations to obtain, in a not-quite-distant future, a more attractive offer or, simply ensuing from no own funds available - as coupled with the required creditworthiness - can be reflected in part of the demand relocating toward the rental market, which may cause increased profitability of such investments over the months to follow.

Finance versus developers' operations

Same as with residential unit buyers, also developers need capital which they acquire from banks or other institutions associated with investment/financial operations, to implement their investment intents. Similarly as for the demand side, problems with acquisition of investment funding means, as combined with a more cautious evaluation of risk(s) on the part of lending banks, have caused that the cost of credit became very high for developers, thus materially increasing the cost of financial expenses of projects under construction. It is worth emphasising that a significant portion of housing investment projects in Romania is (co-)funded by numerous capital groups originating from countries overwhelmed, to a lesser or greater extent, with the financial crisis, which may also get reflected in the scale of developers' activity and number of newly-commenced residential projects in the near future.

Given such a situation, the best prepared ones seem to be those developers that have acquired lands much earlier on at much lower prices and will at present be inclined to quit their rather high margins. Those whose financial assumptions turned out too optimistic and those whose financial standing will not enable them to quietly survive the present economic slowdown may in a rather close future struggle with liquidity-related problems.

What's next?

The Romanian economy, as is the case with the region as a whole, is starting to experience the crisis's effects, but there is seemingly no reason to panic. It may be certain, though, that the present outflow of capital, whose inflow had in the past period been one of the most essential factors determining economic growth in Romania, will affect the pace of development and the living standard of local populace might lower accordingly; however, stability of the financial market seems quite good all the same - unless something occurs in the market in question which will trigger nervous behaviours of local population or banking institutions. Despite any appearances, a positive driver for the local housing market is the fact that Romania is still one of the least developed EU Member States with regards to mortgage-backed loans market. Indebtedness of local people is definitely lower than in other countries of the Central/Eastern Europe region, and this scarcity is now one of the assets that will allow the residential market to avoid a U.S.-like severe shock. On the other hand, the banking system's financial stability will require huge amount of control on the part of the local banking supervisory authorities. Unless the local financial system and the lending market do not get stabilised, the demographic-economic foundations of residential markets of Romania's largest cities can remain continually indicative of a considerable developmental potential.