In this blog, we will try to present you with insight into the current situation and expectations of the housing market and the drivers behind it according to the ECB Financial Stability Review and Economic Bulletin.
In the Financial Stability Review published by ECB, along with ECB’s Economic Bulletin, an interesting insight regarding the European housing market is presented. As we are all aware now, there is a looming macroeconomic uncertainty. The economic outlook for the euro area, as the main part of financial stability, has weakened, while inflation projections have been revised upwards. It is stated that supply chain and cost pressures that have already been built up were just amplified by the war, which resulted in a further increase in commodity prices and substantially weakened consumer confidence. Also, the report emphasizes that consensus expectations for real GDP growth in the euro area in 2022 have been downgraded to 2.7%, while inflation expectations have been revised upwards to 6.8%. Overall, the Euro area economic outlook weakens on the back of global cost pressures and the war in Ukraine.
According to the ECB, the real estate market in the Euro area shows signs of overvaluation and downward price corrections are to be expected. We already witnessed a few rate hikes by ECB and Fed. Restrictive monetary policy might just be the tipping point for the housing market. „Empirical evidence shows that developments on the real estate market are strongly influenced by the level of interest rates“ was published as part of the ECB Economic Bulletin, Issue 6/2022. Their calculation showed that an increase in mortgage interest rates by one p.p. over the course of two years results in a 5% drop in real estate prices. While Fed increased its reference rate by 3 p.p. (up to 3.25 p.p.), ECB raised its reference rate by 1.25 p.p. with two hikes (for now) – with more hikes expected and already priced in. The market has priced in its expectation for ECB to raise the terminal rate to c. 3 p.p. in 2023. If interest rate mortgage followed the way, this would imply a cumulative increase in mortgage rates for 3.5 p.p. (all the way down from -50 bps). This would, from the previously mentioned statement, imply that EU housing market prices could fall by 17.5% over the course of two years after the hikes.
To spice things up slightly, according to the mentioned ECB Bulletin, „rising interest rates affect the real estate market even more strongly in an environment of very low interest rates“, precisely the environment we were in with ECB’S reference rate being in negative territory since 2013 until recent rate hikes.
Eurostat House Price Index [Euro area; YoY]
Source: Eurostat, Bloomberg
Development of local housing market
Average prices of newly sold apartments per m2 (EUR) (2015 – H1 2022)
Regarding the historical data of the region, only growth in volumes and prices can be seen. But looking forward – one might expect a reverse in trend. Looking at the building permits issued in Croatia & Slovenia, we can finally see a slowdown in issued permits. Taking the latest publications into account, issued building permits in July fell both in Croatia and Slovenia for 2.6% and 5% YoY, respectively. Further, according to the Slovenian statistical office in Q2 2022 number of used apartments sold in Ljubljana fell by as much as 25% YoY with price growth slowing its pace a bit. Compared with the quarter before, we can also see a slowdown with 10% fewer deals regarding used apartments. Looking specifically at housing prices in Zagreb average price of newly sold apartments is currently standing at 2,454.3 EUR per m2. If we would apply the mentioned price correction of 17.5% (on the EU level) that could appear over a period of two years, we can infer that the average price in Zagreb in the same period could fall even to EUR 2,024.8 per m2. This is of course a potential outcome and each investor or home buyer has to make sure they take into account all the important assumptions when making a decision. Is it an investment over which one expects a return or is it a home-buying decision? In the case of the latter, one must take into account that a year or two from now, even if prices come down slightly, interest rates on home loans will surely be higher. So, that will cost a home-buyer more monthly if they are taking a loan. It depends if home prices will fall and how much they will fall so that one can calculate all the trade-offs. In order to make a good decision, one has to monitor the housing market and housing loan rate market. The first one is not showing signs of weakening if we are looking at statistics, but this is always a lagging indicator so real-estate brokers are usually the best place to look for answers. Brokers are usually privy to the time of inventory on the market. If it is lengthening that could be a sign that the sellers’ market could be beginning to tilt in the opposite direction. Another sign could be that more sellers have been lowering their prices to attract buyers. On the other hand, we can surely say that at the housing loan rate market in Croatia is beginning to tighten. Bank’s loans asking interest rates have increased since summer by 30 – 80 bps and we are sure that more hikes are to come soon.
UniCredit will buy 11.72% of ZABA from Allianz. Also, UniCredit, although not prevented from a legal point of view, states it is not currently considering delisting ZABA shares from the stock market nor a squeeze-out of the minority shares.
On Friday it was announced that UniCredit will buy 11.72% of ZABA from Allianz. We note that UniCredit is the biggest shareholder of ZABA, currently holding 84.48% of the shares. After this transaction, UniCredit will own 96.2% of ZABA shares with the intention to unwind their direct and indirect shareholdings in the country.
Further, UniCredit states that although not prevented from a legal point of view, it is not currently considering delisting ZABA shares from the stock market nor a squeeze-out of the minority shares.
Within the context of its strong support to CEE banking operations and clients, UniCredit is reinforcing its position in the Croatian banking market, given its strong local commercial presence, as well as the country’s positive GDP forecasts and its upcoming Euro area membership.
By the end of August 2022, the NAV of the Croatian mutual funds remained at roughly the same level MoM, amounting to HRK 16.84bn. Meanwhile, on a YTD basis, the NAV decreased by 21.7%, while compared to its pre-COVID-19 maximum, it declined by 27%.
The Croatian Agency for the Supervision of Financial Institutions (HANFA) has published its latest monthly report on the changes recorded by the Croatian financial markets, ending in August 2022. The current situation in the equity and bond markets across the world, but especially in Europe and the US is extremely volatile due to the negative macroeconomic outlook as well as the potential for further escalation in the war in Ukraine. Combined with the strong inflationary pressures, this is having a strong impact on the capital markets around the world. As Croatian mutual funds have a crucial role in the Croatian capital markets, how these factors influence and guide their decision can give us an overall insight into how the market is doing.
At the end of August 2022, the NAV of Croatian mutual funds amounted to HRK 16.8bn, representing roughly the same levels MoM, but a decrease of 21.7% YTD, and 20.4% YoY. This would technically mean that for the last 2 months, the NAV did not record declines, which compared to the first 6 months of the year, can be seen as a slowdown in the trend. Even so, the NAV of the mutual funds is 27% lower than its pre-COVID-19 maximum, and given the current situation, is unlikely to reach those levels soon.
Delving deeper into the asset types of the funds, on an MoM basis, deposits and cash recorded growth of 2.1% (or HRK 80.7m), while bonds increased by 0.5% (or HRK 43.4m). On the other hand, shares decreased by 3.9% (or HRK 80.5m), investment funds decreased by 2.8% (or HRK 44.1m), and money market holdings decreased by 10.8% (or HRK 30.3m). This would roughly mean that even though there were some changes in the value of the assets themselves (especially shares), August was more of a month when investments were shifted from one type of asset class to another. In fact, the growth in both deposits and cash and bond holdings, while the simultaneous decrease in shares, investment funds and the money market, is the typical type of indication that investments are moved from more risky types of assets to less risky, a trend that we have witnessed all year long. Furthermore, August recorded increased investments into these funds, with net contributions into the funds amounting to HRK 158.5m.
On a YTD basis, however, the story is slightly different. Bonds holdings decreased the most, by HRK 2.7bn (or -22%), deposits and cash decreased by HRK 985.8m (or -20.3%) shares decreased by HRK 593.2m (or -23%), the money market holdings decreased by HRK 233.5m (or 48.2%). Looking at it this way, the decrease in NAV is more driven by the loss of value in these assets, which again, is expected in the current climate, but also the higher amount of redemptions of stakes in these funds by clients.
Meanwhile, looking at the domestic and foreign securities and deposits, in total, they amounted to HRK 14.6bn in August 2022, representing a decrease of HRK 162.8m or 1.1% MoM, and HRK 3.96bn or -21% YTD. Of this, domestic securities and deposits amounted to HRK 8.74bn, representing 60% of the total, while foreign securities and deposits amounted to HRK 5.86bn, representing the remaining 40%.
Croatian mutual funds AUM structure (August 2022, %)
When it comes to the asset structure of the Croatian mutual funds, bonds still account for the vast majority of holdings, at 55.6% of the total (or HRK 9.59bn), which is an increase of 0.3 p.p. MoM, but a decrease of 0.6 p.p. YoY. Following them, we have deposits and cash, which account for 22.4% of the total, which is an increase of 0.5 p.p. MoM, and 0.3 p.p. YoY, and shares, which account for 11.5% of the total (or HRK 1.99bn), representing a decrease of 0.5 p.p. MoM, and 0.3 p.p. YTD.
Total assets of all Croatian UCITS funds (2015 – August 2022, EURm)