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Romanian Housing Market before and during the COVID-19 Pandemic

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  • IROVAL - Research in Valuation
Proceedings of the 3rd International Conference on Economics and Social Sciences (2020), ISSN 2704-6524, pp. 96-105
96
The 3rd International Conference on Economics and Social Sciences
Innovative models to revive the global economy
October 15-16, 2020
Bucharest University of Economic Studies, Romania
Romanian Housing Market
before and during the COVID-19 Pandemic
Elena IONAȘCU
1
DOI: 10.2478/9788366675162-011
Abstract
This research aims to study the sustainability of the development of the housing market
before and during the Covid-19 pandemic in Romania. In this regard, the evolution of
house prices in relation to their market fundamentals was analyzed, and the price-to-
income and price-to-rent ratios and the Hodrick-Prescott filter were calculated. The
estimated indicators show that since 2016, the residential property market has entered a
new phase of expansion of the real estate cycle, but most likely the turning point will be
determined by the intensity of the Covid-19 outbreak. Until the moment of the analysis, the
data indicate that the pandemic outbreak did have a mildly negative effect on the housing
market in Romania, by decreasing households intention to purchase a home, the number of
new home listings and real estate transactions, mainly in the first weeks of the pandemic.
The housing prices remained relatively constant during the state of emergency, but after the
gradual relaxation, they began to decline slightly in major cities. Due to the uncertainty
regarding the future, the long-term impact of the Covid-19 outbreak on the residential
market is unknown, but it will certainly depend on the intensity of the pandemic and the
measures taken by the authorities to support the economy.
Keywords: Covid-19 outbreak, housing market, housing prices, Romania,
pandemic.
JEL Classification: R2, R21, R31, I15
1. Introduction
The Covid-19 outbreak, labelled as a black swan event and likened to the
economic scene of World War Two (Nicola et al., 2020), had and continues to have
a detrimental effect on global healthcare systems and, undoubtedly, on the world’s
economies. The unprecedented social distancing measures adopted by the
authorities have reconfigured the value of housing for each individual. Housing has
always been a sensitive subject, due to the functions it can perform simultaneously:
1
The Bucharest University of Economic Studies, Bucharest, Romania, elena.ionascu@cig.ase.ro,
elena.ionascu.a@gmail.com.
Proceedings of the 3rd International Conference on Economics and Social Sciences (2020), ISSN 2704-6524, pp. 96-105
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consumption, long-term investment, store of wealth, and collateral for lending. For
this reason, the residential market has been the basis of the worst economic and
financial crises around the world, highlighting the close link between the dynamics
of real estate prices and the financial and macroeconomic stability of a country
(IMF, 2019). The financial crisis of 2007-2008, generated by the exponential rise
in house prices as a result of financial liberalization, simultaneously affected all
economic sectors in most countries of the world. Thus, the housing market has
become more sensitive to macroeconomic conditions and therefore, is expected to
be significantly impacted by the economic downturn generated by Covid-19
pandemic (Allen-Coghlan & McQuinn, 2020).
As in most countries, the residential real estate market in Romania has been
severely affected by the financial crisis, because of the unsustainable growth in
housing prices, accompanied by large increases in construction volume and credit.
Following the crisis, the activity of the real estate market in Romania underwent a
strong correction that affected all economic sectors. Therefore, the real estate
market is considered an important source of risk for financial stability and has
come under the close monitoring of national and European authorities. Besides,
since 2016, Romania has started a new phase of expansion of the housing market
activity (NBR, 2017). For these reasons, the dynamics of the residential property
market in Romania must be carefully analyzed in the current context of the
pandemic to prevent possible negative effects on national macroeconomic stability.
The Romanian government introduced the first travel restrictions starting with
March 9, and on March 16 instituted the state of emergency that shut down a
substantial portion of the economy, but on May 18 was introduced the state of alert,
and gradually the restrictions were relaxed. As a consequence of the Covid-19
outbreak, the National Bank of Romania (NBR) (2020, p. 52) draws attention to the
increase in risks generated by the real estate market to financial stability, which are
determined by: (i) the decline in investment and trading amid the rise in investors’
risk aversion, (ii) the sharp contraction in demand due to lower-income and
heightened uncertainty related to future pay, (iii) the increase in credit risk for
housing loans and exposures to companies in the construction and real estate
sectors, and (iv) the higher liquidity and solvency risk owing to the drop in
receipts, as well as to the construction and real estate firms witnessing a reduction
and even a shutdown in the activity. Although these factors have been partly offset
by the government support programs, the risks persist.
2. Problem Statement
Due to the novelty of the events, few studies investigate the impact of the
Covid-19 outbreak on the housing market, and those that exist mainly examine the
situation of the real estate markets in the USA (D’Lima et al., 2020; Liu & Su,
2020; Yörük, 2020), China (Huang et al., 2020), Japan (Narro & Katafuchi, 2020),
Italy (Del Giudice et al., 2020), Ireland (Allen-Coghlan & McQuinn, 2020) and
Turkey (Tanrıvermiş, 2020). The common conclusion of these studies is that the
residential real estate markets were severely affected during the Great Lockdown
Proceedings of the 3rd International Conference on Economics and Social Sciences (2020), ISSN 2704-6524, pp. 96-105
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by the considerable decrease in housing demand, new home listing and volume of
housing transactions.
Yörük (2020) found that by mid-April, certain housing markets from the USA
experienced more than 60% drop in new home listings and pending home sales
relative to the same period in the previous year. In China, the empirical evidence of
Huang et al. (2020) showed that the Covid-19 epidemic had a small negative effect
on housing prices but a large negative effect on transaction volume. Time on the
market was also found to have increased in China (Huang et al., 2020). Allen-
Coghlan and McQuinn (2020) indicated that Irish house prices are set to fall over
the next 18 months as a result of the Covid-19 downturn, due to the decline in
household disposable income and the sharp fall-off in mortgage market activity. In
Italy, the drop in the number of real estate transactions is a certainty because of the
pandemic but it will not be accompanied by an equal drop in prices, at least not in
the short term (Del Giudice et al., 2020). In Turkey, it was also observed a
significant decline of real estate sales in the period March-May 2020, but since
June, the market has recovered slightly (Tanrıvermiş, 2020).
As studies in the field of residential markets in Romania are generally few,
mainly because of the low real estate market transparency and the lack of detailed
data, this article fills this research gap from two perspectives. Firstly, the study
characterizes the development of the housing market since the years preceding the
financial crisis from the point of view of market fundamentals to highlight the
particularities of the Romanian residential market. Secondly, the article presents a
first view on the effect of Covid-19 shut down and re-opening orders on Romanian
residential real estate markets.
3. Research Questions/Aims of the research
This research aims to examine the sustainability of the development of the
housing market in Romania before and during the Covid-19 pandemic, taking into
account the particularities of the behavior of housing demand and supply in
relation to housing prices. There is a widely held view that the current pandemic
influences economies as a combined supply and demand shock (Allen-Coghlan &
McQuinn, 2020). For that purpose, in a first step, the deviations of house prices
from their equilibrium level were studied to identify the possible overvaluations or
undervaluations of the market. In the second stage, the evolution of house prices
and their market fundamentals since the beginning of the pandemic in Romania
were studied to outline the possible perspectives of the housing market.
4. Research Methods
In this study, data on housing price, demand and supply as secondary data were
used to provide the base of analysis and generalization of the prevailing situation in
Romania before and during the Covid-19 pandemic. The data were collected from
the databases of Eurostat, National Institute of Statistics (NIS), National Bank of
Romania (NBR), ANCPI Agency and Imobiliare.ro. The price-to-income and
Proceedings of the 3rd International Conference on Economics and Social Sciences (2020), ISSN 2704-6524, pp. 96-105
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price-to-rent ratios and Hodrick-Prescott (HP) filter were calculated to explain the
sustainability of the housing price development. The price-to-income ratio is a
measure of affordability, while the price-to-rent ratio reflects the relative cost of
owning and renting. The one-sided Hodrick-Prescott filter provides information
about the price fluctuations in comparison to its stochastic trend and cyclical
component.
5. Findings
5.1. Behavior of the Romanian housing market before the Covid-19 pandemic
In the period of the recession of Romania, marked by the transition from the
planned economy to a market-based one, the communist housing legacies remained
broadly unchallenged, but the post-2000 economic growth has stimulated the
developing of the housing market (Soaita & Dewilde, 2019). Against the
background of economic and financial development, the excessive growth of
lending together with the unprecedented inflows of capital from abroad have
contributed to the formation of a significant real estate bubble, characterized by
speculative investments and unsustainable housing price increases (Bálint, 2020).
Romania registered the fastest growth rate in housing prices in the region
(Bálint, 2020), and the new housing construction exploded. According to the NIS
data, in 2008, the number of new housing, built from own funds, was 143% higher
than in 2004. Then, as sources of financing from abroad decreased appreciably due
to financial turmoil, the real estate market collapsed and, as a result, the
construction sector entered a period of decline. In 2009, the average real trading
prices of housing fell by 27% compared to 2008 and continued to decline until
2014 (Figure 1). The number of real estate transactions reduced by 27% in 2009
compared to the previous year, while the real gross fixed investment in housing by
14% (EMF, 2019). Overall, the real house prices fell by 70% from 2008 to 2014,
which represents a notable decrease among EU member states.
Figure 1. Romanian real house prices vs. long-run trend and average (2008=100)
Source: author’s projection based on Eurostat data
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50
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90
100
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Real house prices Average
Liniară (Real house prices)
Continous decline in
prices Return of prices on
ascending slope
Global financial crisis
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The residential real estate market started to recover in 2015 when was registered
a house price increase of 2% (in real terms) from the previous year, which
continued to increase for four successive years, thanks to improving economic
conditions. However, prices did not return to pre-crisis values, which is an
evidence of price overvaluation in the pre-crisis period and a trend of price
correction relative to the long-term market fundamentals. Figure 1 seems to suggest
that Romanian real house prices have been above their long-run average and their
long-run trend until the end of 2011, which indicates that the Romanian housing
market might have been overvalued before the financial crisis. Although the real
house prices since 2011 are, on average, by 7.3% below the long-run average,
with the recovery of the real estate market in 2015, prices significantly exceed the
long-run trend.
5.2. Evidence of unsustainable housing price movements
Figure 2 plots price-to-income and price-to-rent ratios compared to their long-
run averages and trends. As seen from the figure, both ratios seem to signal
overvaluation of the residential real estate prices during the years prior to the
financial crisis of 2008. The deviations from the long-term averages of the price-to-
income and price-to-rent were very pronounced, being about 60-70% higher than
their long-term averages in the years before the crisis. In 2008, real house prices
were twice as high as gross disposable income per capita and rental prices.
Philiponnet and Turrini (2017) and Ionascu et al. (2018) identified similar values
for the positive deviations from the long-run averages in Romania before the
crisis, signaling the overrated housing prices relative to the levels of disposable
income and rents.
a) price-to-income ratio b) price-to-rent ratio
Figure 2. Housing price-to-income and housing price-to-rent vs.
their long-run averages and trends in Romania
Source: author’s calculation based on Eurostat data
Following the crisis, the price-to-income and the price-to-rent ratios decreased
by 45% by 2011, reaching lower levels than their long-run averages, which
maintained so until 2019. While the price-to-income ratio has been on a continuous
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180
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Price-to-income ratio
Long term average = 100
Liniară (Price-to-income ratio)
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downward slope since the beginning of the crisis, the price-to-rent ratio has risen
annually slightly by 3% beginning with 2016. Figure 3 presents the development of
real household disposable income and real rents versus real house prices. After an
extended period of negative or stagnant development between 2009 and 2014, real
household disposable income continued to grow, while the real rents remained at a
relatively constant level. Between 2014 and 2018, the real household disposable
income per capita increased by 30% (on the average, by 6% per annum), while the
housing prices with 12% (on the average, by 3% per annum). The figure shows that
housing prices did not keep the pace with the increase in income during this period
and that the disposable income increased considerably more than prices since 2015.
This implies that an increase in household disposable income is not fully captured
by the real housing prices and that other factors may contribute to the widening gap
between housing prices and disposable income in recent years.
Figure 3. Real housing prices vs. disposable income and rents (2008=100)
Source: author’s projection based on Eurostat data
The slight increase in Romanian housing prices since 2015 has been amplified
by high demand, compared to the existing housing supply that is very limited.
According to Eurostat data, 46.3% of Romanian population was living in
overcrowded dwellings in 2018, compared to the EU average of 17.1%, and more
than half of the existing dwellings is old, being built during the period 1946-1980.
The demand for housing was also driven by the population’s access to housing
lending through the “First Home” program and by lowering interest rates on loans.
After the crisis, the rate of charge on loans to households for house purchases was
on a continuous downward slope until the end of 2017, when interest rates began to
rise from one month to another.
40
50
60
70
80
90
100
110
120
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Real housing prices
Household disposable income per capita (real terms)
Real rentals
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Figure 4. House price deviation from the HP filter
Source: author’s calculation based on Eurostat data
The calculated HP filter reflects the same trends as price-to-income and
price-to-rent ratios of pre-financial crisis price overvaluation by around 40% and of
price undervaluation in post-financial crisis, on average by 14%, followed since
2015 by a stressed sharp rise in price of up to 20%, compared with its stochastic
trend and cyclic component (Figure 4).
The emergence of the housing bubble in the early 2000s led to further house
price inflation and a higher sensitivity of real estate markets to macroeconomic
conditions. This implies that housing markets are set to be substantially impacted
by the economic downturn due to Covid-19 (Allen-Coghlan & McQuinn, 2020).
5.3. Behavior of the Romanian housing market during the Covid-19 pandemic
The effects of the Covid-19 pandemic on the demand and supply of the real
estate market were observed from the very beginning of March when Romanian
authorities imposed the first restrictions to limit the spread of the new coronavirus.
In the first weeks of the emergency state, the demand for the housing purchase and
the number of homes listed for sale fell sharply, as, between March 9-29, the
demand decreased by 70% and the number of apartments and houses put up for
sale by 60%, while the housing prices remained unchanged, compared to the
beginning of the month, in six major cities (Analizeimobiliare.ro, 2020). This
dramatic decline in supply and demand in the housing market is mainly explained
by the government’s shutdown orders that restricted the operation of businesses
and limited interactions among people. Against the background of the uncertainty
generated by the coronavirus crisis, probably more buyers postponed the purchase
of real estate until the economic outlook becomes clearer. Consequently, in April
2020, real estate transactions fell by 44% compared to March and by 33%
compared to the same period of previous year, according to ANCPI (2020).
Given the particular nature of the restrictions imposed by authorities, the impact
on the domestic labor market has been particularly severe, affecting the purchasing
power of households. Unemployment, which in late February 2020 had been at
4.3%, in June had reached 5.3%, with many businesses in the retail,
accommodation and food service activities, manufacturing and construction sectors
90
140
190
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Overvalued Undervalued Trend Real housing prices
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being forced to suspend or terminate the employment contracts of the more than
one million employees. According to estimations of Almeida et al. (2020),
throughout 2020, on average, households’ disposable income in the EU would fall
by -5.9% due to the Covid-19 crisis without discretionary policy measures, and by
-3.6% with policy intervention, pointing that the impact is likely to be highly
regressive, with the poorest households’ being the most severely hit. Inevitably,
this will have a significant impact on individual’s abilities to pay rent, mortgages
and various household expenditures (Nicola et al., 2020), given that in 2019, 8.6%
of the Romanian population lived in households that spent 40% or more of their
disposable income on housing, but the proportion was highest for tenants with
market price rents (39.8%).
Because of social distancing precautions and uncertainty, both housing
demand and supply, represented by builders and developers, had to reconsider their
plans. The construction industry was slightly affected by the pandemic during the
state of emergency, according to NIS data. About 15% of all employees laid off
due to the pandemic were employed in the construction industry. Starting with
February 2020, the volume of residential buildings decreased slightly, on average,
by 5% monthly, until June, but compared to the corresponding periods of last year,
the volume of construction works of residential buildings was net superior. As a
result, in the first half of 2020, 29,765 dwellings were brought into use, growing by
2,561 units compared to the first half of 2019, increasing also the share of the
number of housing built from private funds (NIS, 2020).
With the gradual resumption of activities, through the successive relaxation of
restrictions imposed on the population for preventive purposes, the housing market
reacted positively, so that both demand and supply of properties gradually
recovered. While the demand and supply of housing reacted immediately to
administrative closures, the effects on prices were delayed. The prices remained
relatively constant during the state of emergency, but with the gradual relaxation,
the listing prices for new and old apartments in the major Romanian cities began to
decline slightly from one month to another, on average by 1-2% (Figure 5).
a) old apartments b) new apartments
Figure 5. The monthly evolution of prices for new
and old apartments in major cities in Romania, 2008 2020
Source: author’s projection based on Imobiliare.ro data
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Brasov Bucharest
Cluj-Napoca Constanta
Timisoara
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Timisoara
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Such effects on housing markets have occurred in most countries affected by the
pandemic crisis, regardless of the intensity of virus spread or timing of the
introduction of state level policies to combat the pandemic.
Although the data show that the Covid-19 epidemic did have a mildly negative
effect on the housing market in Romania, the long-term impact of the pandemic on
the real estate market will depend on the duration of the crisis and the effects of
measures taken by authorities, such as job protection and income.
6. Conclusions
This research aimed to study the sustainability of the development of the
housing market in Romania before and during the Covid-19 pandemic, taking into
account the particularities of the behavior of housing demand and supply.
The post-2000 economic growth has stimulated the developing of the housing
market in Romania. The economic and financial development, along with the
excessive growth of lending and high inflows of capitals have contributed to the
formation of a significant real estate bubble, characterized by speculative
investments and unsustainable housing price increases. Following the crisis, house
prices suffered a strong negative correction, which fell by 70% between 2008 and
2014 (in real terms). The market has recovered slightly since 2015, and beginning
with 2016, under the demand pressure, it entered a new phase of expansion.
The effects of the Covid-19 pandemic on the housing demand and supply were
observed from the very first weeks of the state of emergency when the population’s
interest in housing purchase and the number of homes listed for sale fell sharply.
Social distancing precautions have reduced house views, while the economic
uncertainty determined more buyers to postpone the purchase of a real estate,
which led to a considerable decrease in the number of real estate transactions.
While the demand and supply of housing reacted immediately to administrative
closures, the effects on prices were delayed. The prices remained relatively
constant during the state of emergency, but after the gradual relaxation, they began
to decline slightly.
Although the data shows that the Covid-19 outbreak did have a mildly negative
effect on the housing market in Romania, mainly at the beginning of the pandemic,
the long-term impact will depend on the duration of the crisis and the effects of
measures taken by authorities. For this reason, the real estate market must be
closely monitored to identify on time the possible negative effects of the pandemic.
Thus, this research topic remains open for further analysis to document the
housing policy.
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ResearchGate has not been able to resolve any citations for this publication.
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Employing a long-term perspective we explore whether ideologically-rooted quality outcomes of housing provision under communism have persisted during the post-communist construction of housing markets. Drawing on theories of path-dependent change, we hypothesize that patterns of housing quality still reflect past lines of division, namely the Soviet housing model, and the classical and reformist models of the Eastern Bloc. Using a critical-realist approach to housing quality, we relate households’ experiences to key underlying structures; this ontological depth is then operationalized by means of micro- and macro-indicators used as input for Hierarchical Cluster Analyses. Findings support our main hypothesis, yet there is more diversity in households’ experiences than initially assumed. Our study advances a valuable middle-range epistemological frame for understanding the complex social reality of housing and helps shatter the growing view that communist housing systems were all too similar.
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This paper provides novel evidence on pricing effects in housing markets following government shutdown responses to COVID-19 using micro-level data on U.S. residential property transactions. We find that post-shutdown pricing effects not only depend on population density but also the size and structural density of properties. The average price of a three-bedroom property fell by approximately 1.4% in densely populated locations (e.g., downtown) but increased by about 1.5% in low-density locations (e.g., suburbs) where shutdowns were enacted. The effects are more drastic for properties with fewer bedrooms. We also document a significant decrease in sales for markets under a shutdown. This article is protected by copyright. All rights reserved
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Purpose This paper aims to examine the implications for the Irish housing market of the economic slowdown due to the Covid-19 virus. Design/methodology/approach In this paper, an inverted demand function for housing is augmented to include a residential market activity variable and estimate the impact on house prices of the decline in economic activity due to the virus-related measures. The likely future path of house prices based on two different recovery scenarios is also examined. Under both scenarios house prices are forecast to decline in the near term. Findings The scenario analysis presented here indicates that Irish house prices are set to fall over the next 18 months as a result of the Covid-19 downturn. This contraction in prices is due to the decline in household disposable income and the sharp fall-off in mortgage market activity, which will inevitably result from the administrative closedown implemented by the Irish authorities. Originality/value As such the approach builds on several studies which have examined both house price movements in general and the relationship between house prices and mortgage credit availability. The paper also draws on the latest analysis of the implications for the Irish economy of Covid-19 and the related administrative closure methods introduced by the public authorities.
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The COVID-19 pandemic has resulted in over 1.4 million confirmed cases and over 83,000 deaths globally. It has also sparked fears of an impending economic crisis and recession. Social distancing, self-isolation and travel restrictions forced a decrease in the workforce across all economic sectors and caused many jobs to be lost. Schools have closed down, and the need of commodities and manufactured products has decreased. In contrast, the need for medical supplies has significantly increased. The food sector has also seen a great demand due to panic-buying and stockpiling of food products. In response to this global outbreak, we summarise the socio-economic effects of COVID-19 on individual aspects of the world economy.