Sustainability an Issue for Eastern European Property Prices

Sustainability an Issue for Eastern European Property PricesWhen looking at any investment property market anywhere in the world there are certain key aspects of the market that an investor doing the right due diligence will examine closely.  One of these key aspects is the sustainability or otherwise of property price increases; and going hand in hand with this aspect is examining the driving forces behind a sustainable market situation.

In Eastern Europe at the moment there is an undercurrent of uncertainty among investors and property market specialists as they start to question the substantial price gains that certain markets have enjoyed on the basis of sustainability and find some quite significant issues that could undermine the future success of property investment in Eastern Europe.

On the one hand the 8 former communist countries that joined the European Union back in 2004 have all welcomed substantial foreign direct investment into property spearheaded by British buyers, supplemented by Irish buyers and boosted by purchasers from other Western European countries such as Spain and the Netherlands.  This level of intense interest has led to incredible property price gains in locations such as Prague, Warsaw and Riga for example and the price gains have begun to dissipate and affect the entire real estate sector in each individual country.

While this is positive news for the economies of these nations and for investors who bought early on in the cycle and who have now sold on and released their profits, it is nothing but very bad news indeed for the vast majority of local residents and citizens. 

Where property prices have risen by up to 100% since 2004 in some locations, wages have barely increased at all.  The companies flocking to the Eastern European countries to near-shore operations have been drawn to the countries by among other things the low cost of the workforce – so how can a poorly paid individual in Eastern Europe be expected to compete for property on the same scale as a Western European buyer on a Western European salary?

In locations such as Prague which is rich in tourism traffic and which has an undeniable and unceasing universal appeal, the fact that local buyers can’t afford property doesn’t really matter in terms of the greater economic picture because there is sustained and sustainable international interest.  In cities such as Warsaw and Riga or in lesser known areas of countries like Slovakia and Slovenia for example, who’s going to continue to drive the market?

Unless local buyers can afford to buy into areas that have low tourism appeal or corporate or student let appeal for example, there will likely come a time when those looking to sell on assets find that there are no longer buyers interested in the product.  At the moment while the property investment hype continues and more and more people are buying in more and more diverse locations property prices will continue to rise – but as soon as demand drops away – which it probably will – what will happen?

Surely the bottom will fall out of many Eastern European property markets?  Not so according to one optimist from the Austrian Raiffeisen International Bank AG who believes that the introduction of competitive mortgages across Eastern Europe will allow local buyers access to finance to buy homes in their own country whose prices have been inflated by Western buyers…well, we’ll watch and we’ll wait and we’ll let you know!

Page 1 of 1