Strong Credit Activity and Rising Incomes Drive Up Housing Prices in Bulgaria

In the second quarter of the year, the housing price index in Bulgaria increased by 15.1% year-on-year, slightly lower than the 16% rise in the first quarter. Both new homes and existing properties saw price increases, with new homes rising by 15.6% and existing ones by 14.8%. This trend was also evident in the six largest regional cities, where a notable acceleration in price growth was observed in Ruse, Burgas, and Stara Zagora. These findings are detailed in the Bulgarian National Bank's quarterly publication, Economic Review.

Several factors are contributing to the rise in housing prices. Increased household incomes, strong lending activity, and historically low annualized interest rates on new home loans have been significant drivers. Additionally, the limited options for investing savings, given negative real interest rates on deposits, are also pushing more people toward the housing market. The volume of completed sales transactions has also surged, rising by 26.2% compared to the previous quarter, alongside an annual increase in the cost of construction for new buildings.

However, despite these positive factors, there is some indication of a limit to how much housing prices can continue to grow. A weakening in households' enthusiasm for purchasing new homes has been observed, which could moderate price hikes. The house price-to-rent ratio, a common indicator of housing overvaluation or undervaluation, remains 43% higher than its long-term average. This suggests that households are purchasing homes for reasons beyond immediate financial returns, such as the anticipation of future capital gains or viewing housing as a stable store of value amidst negative real interest rates.