Is the East European property bubble set to burst?

published 9 August 2007

Unscrupulous property agents are promising massive capital appreciation and exaggerated rates of return on properties in the emerging markets of eastern Europe. Under-regulation in the industry means these agents can make the most outrageous claims. No doubt they will be the only people who come out of this bubble with a profit.

Eastern European property: what estate agents are promising

The issue of honest estate agents in central and eastern Europe was underlined recently by the Irish Association of Investment Managers, which said that advertisements promising capital appreciation of up to 50% and guaranteed rental income of 10% were becoming a regular feature of overseas property advertisements. As such, money was pouring into the sector, said IAIM chairman Gary Connolly. "In terms of mania, it is reminiscent of the stockmarket of the late 1990s," he said.

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Bulgaria is the latest hot spot, with currency specialist HIFX recently stating that enquiries about borrowing to fund buying homes there have risen by 17% over the past year. Foreigners were involved in 23% of the 220,000 property deals registered in Bulgaria in 2005, compared with 18% a year earlier. Prices have risen in Bulgaria every year for the past 12 years. But now it seems that any further increase is being driven solely by property speculators from western Europe, who believe that the party is set to continue. Last year, Bulgaria, the Czech Republic, Poland, Romania, Russia and Slovakia acquired e5.8bn from overseas property investors. The figure represents a 38% increase compared to e4.19bn in 2004.

The eastern European property bubble looks like it is in danger of overheating, "with large numbers of developments being built and investors chasing high returns, who could be easily scared off by any market wobble", says Simon Lambert in The Mail on Sunday. Indeed, although property prices rose in most European countries last year, 2006 "contains growing risks for housing investors", with rising interest rates in the eurozone and fears of greater currency volatility, the Royal Institute of Chartered Surveyors warns. However, many investors in both Britain and Ireland seem content to believe the hype and continue to pour money into the market, even if it means getting into increasingly unsustainable amounts of debt.

According to Daniel Gros, director of the Centre for European Policy Studies, and Thomas Mayer, chief European economist at Deutsche Bank in London, the "unprecedented rate of expansion" in property lending in the past year (up 11% during 2005) should be noted. "The data on lending suggest that many households are taking on heavy repayment obligations at a time when house prices have reached a historical peak," they said in the Financial Times.

This is nothing more than a fad that has turned into a bubble and should be ignored by investors. Every bill board in London seems to be advertising one European property expo or other. But remember the wise words of Joe Kennedy, father of John F Kennedy, who when asked why he sold all his shares before the Wall Street Crash remarked: "when the shoeshine boy starts talking stocks, its time to sell".

Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.