In the last few years, we have witnessed a rise in real estate prices in Serbia. The growth of prices of apartments for sale has an impact on the growth of apartment rent, so that this price increase was felt not only by those who bought or are looking to buy an apartment, but also by tenants. Why have real estate prices risen so much?
Money laundering is not a reason for rising prices
One of the more amusing, but not exactly accurate theories about what is raising real estate prices in Serbia is that it is a consequence of money laundering. This theory is based mainly on the fact that only 16% of registered real estate purchases were made through a housing loan, while the remaining 84% was purchased in cash. But who can really cash out 100,000 or more euros to buy a two-bedroom apartment in the wider center of Belgrade, having in mind the level of salaries in the country? There are certainly such people (entrepreneurs, more successful professionals as developers or lawyers), but not so many of the buyers of apartments. The logical conclusion is that these are not pure business and that the purchase is mostly made by criminals in order to launder the money earned by illegal activities. The consequence of that money laundering by buying real estate is an increase in their price: the basic economic law is that prices rise when demand grows faster than supply.
But there are a couple of problems here. The first is that the process of buying an apartment does not go by someone showing up with a jeep and taking out a suitcase with money to buy an apartment, but all payments are made through a bank, by transferring funds from the buyer’s account to the seller’s account. If the commercial bank where you have an account, the National Bank or the Tax Administration do not ask where you suddenly pay 100,000 euros in the account to pay for the apartment, then it means that the financial flow control system is practically non-existent so there is no need to buy real estate to launder money. Another problem is that drug dealers and similar businessmen do not need real estate – they mostly need cash. So, if they are laundering money by buying real estate, they would very quickly want to sell the same real estate themselves in order to withdraw cash. If they want to sell the mentioned real estate quickly, having in mind that the real estate market in Serbia is not liquid (which means that you usually have to wait for a buyer for months or weeks), then they must also offer a discount, that is to offer them at a slightly lower price. Therefore, if money laundering by buying real estate leads to an increase in the prices of apartments, then their sale in order to extract cash should lead to a fall in prices, so these effects would generally cancel each other out. The third problem is that in the real estate market in Serbia, there are frequent tied purchases – for example, children sell a larger apartment inherited from their parents in order to divide the property, then each of them buys a smaller apartment with that money; or the seller of the apartment buys the apartment at another location from the money received. It is enough that each housing loan approved by the bank has a multiplier of 5 (that is, it entails 5 other related sales) so that all real estate purchases actually originate from the issued loans. We do not know how much this multiplier for the real estate market in Serbia is, but it is certainly much higher than one.
Is there money laundering through the purchase of real estate in Serbia? Most likely yes. Is this kind of money laundering dominant on the market and does it affect the growth of real estate prices? Almost certainly not.
Real estate prices are rising everywhere
Rising real estate prices in Serbia (primarily in Belgrade and Novi Sad) are not an isolated case: real estate prices are rising in most major cities around the world. Therefore, it is most likely that the same systemic disturbances that affect the growth of prices in other countries also affect the trends in our country. For example, the average growth of real estate prices in OECD countries was 29% compared to 2015 prices; while in Germany, for example, it was as high as 40%. The record holder was Hungary, with real estate growth of 78% in this period.
The most significant of the systemic effects is the movement of interest rates. With lower interest rates, loans become more affordable, because the loan installments are lower – more people will be able to buy real estate than before, so this leads to a rise in prices. When we look at the growth of real estate prices in OECD countries, it quite coincides with the historically low interest rates that are a consequence of the monetary policy of the central banks of the Eurozone, the USA and Japan. Interest rates in Germany are even negative (in other words, you have to pay the bank that keeps your savings instead of yours), and in the UK close to zero; In such an environment, investing in real estate is not an unreasonable business decision if you are an investment fund, bank or insurance company, or even if you are an entrepreneur who would rent and collect real estate income or if you simply want to buy an apartment to live in.
The movement of interest rates did not bypass Serbia either, having in mind that the majority of capital and deposits are in euros or dinars, but indexed in euros. The fall in interest rates begins in 2014, right with the beginning of the European Central Bank’s quantitative easing program – cheap capital is just everywhere, so it comes to Serbia from the EU and lowers interest rates.
The growth in the number of potential buyers raises prices. The rise in prices would be even more significant if it were not built everywhere in Belgrade – more or less wherever you look around the city, you can see some construction sites, and apartment blocks and even entire housing estates are being built next to detached buildings.
But in addition to interest rates and housing loans, there are several other factors that influence the prices of apartments in Belgrade to rise. The first is that parts of the city desirable for housing have already been built and it is difficult to find new space for the construction of new housing units. These are primarily central city areas and parts of New Belgrade, which are areas where there is a well-maintained communal infrastructure that is maintained, and a large concentration of solvent population means the concentration of a large number of services in the neighborhood – from gyms, beauty salons, cafes, restaurants and so on. Something like this exists in Vracar, Stari Grad, New Belgrade or Banovo Brdo, but not in Banjica, Kumodraz or Visnjicka Banja, where the streets are regularly less clean, not to mention parts of the city without sewerage, such as parts of the Danube Wreath or that in some parts of the city there are no parks at all, because all the land has been used for construction. So if you want to have a decent infrastructure, you can’t choose too much, and that means rising prices.
Another important factor is the purchase of real estate by our workers abroad. After retiring, most of them return from Western Europe to the region, to enjoy a pension in peace, which has significantly higher purchasing power here than in the countries where they were earned. Some of them intend to buy real estate in Belgrade in order to live in it after retirement. It is estimated that about 15,000 people return to Serbia every year – most of them are pensioners.
The third factor is buying apartments for rent. With the advent of flatbeds for renting apartments, such as AirB&B, there has been an explosion of such real estate rentals all over Europe, so much so that it has raised real estate prices in the center of tourist cities – strong movements have even emerged in Barcelona and Paris. a ban on such services in those cities, because rising prices have literally pushed the natives out of a large number of central neighborhoods. Belgrade is no exception in this regard, and such services are still popular despite the failed tourist season due to the corona pandemic.
The fourth factor is the inability to invest in something else. While in countries with developed capital markets, the middle class can invest their savings in investment funds or directly on the stock exchange through brokers, these opportunities are quite narrow in our country. A small number of companies are listed on the stock exchange, and trading in their shares is not significantly represented, while starting a small entrepreneurial project is also quite difficult given the high business risk due to poor business environment, so if you have significant savings, you can only invest in a couple of existing investment funds or keep in a bank account, which with very low interest rates doesn’t really make sense. In contrast, buying an apartment for rent brings a much higher yield, and you are left with a property that you can sell if you need the money.
The fifth factor is also demographic: although Serbia is emptying due to low natural growth and high emigration rates, Belgrade still receives more immigrants than people emigrate from it. And not only from Serbia, but also from Montenegro and Bosnia and Herzegovina, but to a lesser extent from the rest of the region and Europe, as a regional business center of at least the Western Balkans. While from 2012-2019. the number of inhabitants in Vojvodina decreased by 70,000, in Western Serbia with Sumadija by 118,000 and in Southern and Eastern Serbia by 117,000, while the number of inhabitants of Belgrade increased by 30,000 (population estimates of the Republic Bureau of Statistics). Of course, this number does not include people who are not officially registered to live in Belgrade, such as students who have been studying in Belgrade and have been living there for years, but their residence is still registered at the address in the city where they are from. Population growth certainly affects the demand for apartments in the city, which puts pressure on prices, Talas reports.
