Episode 91 - Miro on the euro and property

Bulgaria's accession to the euro area is a topic that evokes strong reactions, often charged with emotions rather than facts. While some express concerns based on nationalistic sentiments, others focus on the potential economic consequences. But what does the euro actually mean for the real estate and property market in Bulgaria? Let's take a deeper look, including the experience of other countries.

The euro debate: More noise, less awareness?

Protests against the euro often seem like a social phenomenon, devoid of deep economic reasoning. Instead of analysing the real data and the potential consequences, the focus often falls on superficial patriotism and defending the national currency, even though our economy has long been strongly linked to the euro. The prices of most goods and services are set against the euro anyway, and foreign companies play a dominant role in the Bulgarian economy.

Key Changes: Mandatory Reserves and the Domino Effect

One of the most significant direct impacts of euro adoption will be the reduction of the reserve requirements that Bulgarian banks have to maintain. Currently they are 12%, but after euro adoption they will drop to only 1%. This change will free up significant capital, and this in turn will lead to several potential scenarios:

• Capital entering the real estate market: one of the most likely scenarios is that a large part of these funds will flow directly into the real estate market. This would keep mortgage rates low, making home lending more affordable for more people. The main criterion for buying a home will remain the possibility of a manageable monthly payment.
• Covering external debts: part of the freed-up capital could be used to reduce the country's external debt, which would improve fiscal stability and investor confidence.
• Potential for concentration of capital: there is also a risk that this capital could flow into certain political or business circles, raising concerns about corruption and undue advantage.

Despite the positive impact of lower interest rates, we should also prepare for the effect of so-called"artificial inflation" in the prices of construction materials. Combined with the increased cost of building permits, the lack and high cost of land, and rising labour costs, this will inevitably lead to a significant increase in the cost of new construction.

The experience of other countries: what do we learn from them?

Understanding what has happened in other countries since adopting the euro can give us a valuable perspective:

• Slovakia (2009): Since the adoption of the euro, Slovakia has seen sustained growth in property prices, especially in the capital Bratislava. Lower interest rates and easy access to credit stimulated demand. However, an initial price "depreciation" effect (the so-called "rounding up") was observed for some goods and services, but not for property in the long run.
• Slovenia (2007): Like Slovakia, Slovenia also experienced an increase in real estate prices after joining the euro area. Foreign investment increased as the euro provided greater security and removed currency risk.
• Estonia (2011): In Estonia, the adoption of the euro also coincided with a growth in the property market, supported by lower lending costs and increased investor confidence. However, the market was also affected by wider economic factors and global trends.
• Lithuania and Latvia (2014 and 2015, respectively): the Baltic States experienced a similar trend - increased demand and property price growth, albeit with some fluctuations related to the macroeconomic environment.

The general conclusion from the experience of these countries is that the adoption of the euro often leads to lower interest rates, increased liquidity in the market and increased interest from foreign investors, which in turn stimulates property price growth.

Conclusion: realistic expectations

The introduction of the euro in Bulgaria is likely to lead to lower interest rates on mortgage loans, which will make buying a home more affordable for many. However, this will be balanced by rising construction costs which will increase the price of new supply. So while access to finance may improve, property prices are unlikely to fall, but rather continue their upward trend, fuelled by a variety of factors. It is important to look at this process with an informed and pragmatic view, rather than giving in to emotional reactions.