Changes in Real Estate Financing Conditions by Banks and Their Impact on the Real Estate Market

The real estate market is a specific market due to the heterogeneity of real estate. Depending on the type of real estate being traded, it is divided into submarkets. From the data obtained from various databases, it can be established that prices have indeed risen sharply in the past. The reasons were various: increased demand for flats, favourable loans, increased purchasing power of the population...

Problem

The real estate market is a specific market due to the heterogeneity of real estate. Depending on the type of real estate being traded, it is divided into submarkets. We can only speak of the Slovenian real estate market from 1990 onwards.

Changes occurring in the market appear cyclically, depending on the supply and demand for real estate. The first serious changes in the residential real estate market came with the Jazbinšek Act. In the second half of the 1990s, the first noticeable differences between individual local markets began to appear.

An individual can decide to rent or purchase a property. Each option has its advantages and disadvantages. The purchase of a flat can be financed with equity or with debt capital.

Thus, banks also have a significant influence on market developments, as they enable different methods of financing under different conditions (interest rates, loan approval costs, repayment period...). The diploma thesis presented the offers of different banks and the movement of the effective interest rate from 2005 onwards, as well as the volume of housing loans to the population. The real estate market or the prices of flats are also greatly influenced by the supply of newly built flats, which has been constantly increasing since 2005.

Thus, the thesis presented the number of newly built flats, the number of sales transactions completed, and the average prices of flats per m2. The Slovenian real estate market is influenced by the supply of real estate and the global financial crisis, which makes money more expensive and thus bank loans more expensive. Bank loans strongly connect the real estate market with financial markets, which are global.

As long as the price of money continues to rise on interbank markets, an increase in interest rates and more difficult access to loans can be expected, and consequently people's purchasing power will continue to decline. Real estate is a very specific type of goods, characterised by a long lifespan, great diversity in supply, and high prices. Housing, alongside clothing and food, is essential for a decent life for an individual.

Depending on their financial possibilities, individuals decide between renting and purchasing a property. To understand how the real estate market works, it is necessary to know the basic laws of the real estate market.

Results

From the data obtained from various databases, it can be established that prices have indeed risen sharply in the past. The reasons were various: increased demand for flats, favourable loans, increased purchasing power of the population... Flat prices reached a level that exceeds the purchasing power share of a significant number of potential buyers, whilst at the same time more new properties appeared on the market.

There was an excess of supply over demand, and prices (especially of used flats) began to fall. A normal real estate cycle is currently taking place in the market. The financial crisis will not directly affect their real estate market, but indirectly through the price of money on interbank markets.

This influence is already evident, as loan interest rates are rising and banks are setting increasingly strict conditions for obtaining loans, which is particularly felt by investors. Due to the increase in loan costs, we can expect a decline in the construction of new properties (which, according to data from the Statistical Office of the Republic of Slovenia, is already indicated by a decline in the number of building permits issued) and a decline in the number of buyers. The analysis of housing loans presented in the diploma thesis confirms the hypothesis set out at the beginning that housing loans have become more expensive and that the conditions for obtaining a housing loan are tightening.

The analysis of data regarding concluded sales contracts for flats demonstrates a reduction in transactions in the market. Recently, more and more speculation has appeared in the media about what will happen to the real estate market. Some predict a fall in prices, others continued growth, whilst data from the Surveying and Mapping Authority of the Republic of Slovenia for 2008 still show price growth, but at a moderate rate.

Predicting price growth trends several years in advance is a very complex and not particularly rewarding task. The prices of new builds will most likely not fall drastically, as investors do not always have many options for manoeuvring (high land prices). There will certainly be a fall in the prices of used flats, which in 2007 already reached almost 80% of the value of new builds.

I believe that the time has come when the state and investors can awaken the functioning of the rental housing market. With a good approach, investment should also be made in this area. The state should use tax instruments to activate the rental of existing flats.

However, the rental of flats is taxed in such a way that the rental real estate market is completely opaque, with the majority remaining in the grey economy. Her proposal regarding ensuring that there are not so many unfinished, empty buildings and unoccupied flats on the market is that investors should start renting out newly built flats. In this way, they would also cover a certain part of the construction financing costs.

Tenants could later also purchase the flats. A 'winter' is coming to the real estate market, which will cleanse it and stabilise price growth. However, growth such as that seen in recent years can no longer be expected.

There will certainly be fewer small investors who were convinced that large profits could be made with real estate, whilst paying less attention to the quality of living. In recent years, there have been quite a few companies that abandoned their core activity and began to engage in the construction and sale of real estate. Flats must suit buyers and meet all the requirements for quality living.

In the future, flats that are built to a high quality and in good locations will still sell well and without difficulty. Technical parameters, flat area, interior finish, energy efficiency, noise protection, landscaped surroundings, social structure... will become important. In conclusion, I can write that bank financing does influence the residential real estate market, but it is not the only factor influencing it.

At this moment, it is also significantly influenced by the general financial and economic crisis and the large number of new builds or the excess supply of flats.