Why flat prices may keep falling
We hear about property prices from every direction, and many people are trying to convince us that they have already hit rock bottom. Why do I think that isn't the case?
In this blog I'll try not to burden you with any in-depth analyses or complex charts. My aim is to use basic logic to explain why residential property prices still have room to fall further.
Since the summer of 2022 the property market has been hit by a demand shock. Rising interest rates have limited what buyers can afford. Let me give you an example:
Let's say you can afford a monthly repayment of EUR 640 over 30 years. At a 1% interest rate, that lets you buy a flat for EUR 200,000. At 4%, you can only buy a flat for EUR 135,000. For simplicity, the calculation assumes the bank gives you 100% financing and you don't need any equity of your own.
Prices of better new-builds and premium locations, where people buy with cash, fell more slowly. The middle segment of the market, on the other hand, dropped. While at the peak of the market you could get as much as EUR 240,000 for a 3-room (two-bedroom) panel-block flat in Petržalka, now you'll be glad to get EUR 190,000. A smaller 1-room flat (studio) in Slnečnice used to sell for EUR 150,000; today similar flats are advertised for EUR 130,000.
It took sellers months to realise that they wouldn't sell anything at early-2022 prices. Some developers still haven't realised it to this day – or at least they pretend not to have. If they admitted that prices had fallen, they would set off an avalanche among the others too. That's why, with developers, lower prices only show up indirectly for now – free parking, extra furnishing of the flat, an architect's design as a bonus, a new kitchen included in the price of the flat, and so on.
The demand shock has gradually been priced into flat prices. Those who had to sell cut their price; those who didn't rented the flat out or are holding on to it and waiting. So the demand side is unlikely to shake prices much any more. What we tend to forget, though, is the supply side.
Let me start with the bigger picture. After years of good times, people can't imagine what high unemployment means. Just as in 2020 nobody could imagine what high inflation meant. But the first signs are already appearing abroad. Many companies expect a recession and are gradually starting to lay people off. A similar scenario is possible in Slovakia too.
What happens if people suddenly lose their jobs and can no longer keep up with their loan repayments? They will have to sell – there will be no room left for waiting. A rapid influx of properties onto the market will push prices down further. By how much? Nobody knows. In theory, we could even get back to early-2020 prices. And that was a period when interest rates weren't as high as they are today, but only in the range of 1.00–1.50%.
But the ECB is already planning to start cutting interest rates – won't that make flat prices go up? In the short to medium term (up to 5–7 years), probably not. First of all, rate cuts will be gradual and won't get back to 2021 levels any time soon. Moreover, interest rates in Slovakia depend not only on the ECB rate but also on how risky our country is perceived to be on the bond market.
For a long time, people in Slovakia borrowed at almost the lowest rates in the eurozone; today there is a risk that our mortgages will be among the most expensive, says Daniel Kollár, CEO of ČSOB bank and President of the Slovak Banking Association. The consequences of the Fico government's steps and of the failure to consolidate public finances, which is why financial markets trust Slovakia the least in the eurozone, will thus be felt by ordinary people too. (Denník E)
So why do the heads of estate agencies say the opposite? Because if they publicly admitted that they expect prices to fall further, nobody would buy what they currently have on offer. Everyone would wait. Imagine car dealers announcing that next year all their cars will be 10–20% cheaper. They could probably close their showrooms for the rest of this year. That's why estate agents, too, should be seen more as salespeople than as market analysts.
And one last tip. Current asking prices have little in common with actual selling prices. Feel free to knock 5–10% off them, depending on the location and how premium the flat is. If this blog hasn't convinced you and you want to buy right away, don't be afraid to ask for a discount of at least that much.
