Historical Bulgarian House Prices, Rents, and Incomes

After the post on FairPlay, several people contacted me with questions about Bulgarian REITs and the real estate market.  So, I compiled some historical data on house prices and rents in major cities.  Unfortunately, information about the resorts is scarce to nonexistent.  Overall, real estate price information is scattered and inconsistent.  What I have done is a best effort at putting together some useful statistics.

General Sources

One of the best sources of real estate data is the Global Property GuideThe Economist also offers some historical house-price data.  Alternatively, there is Numbeo, which has the useful function of overlaying the data on a map.  But where it really shines is the number of cities covered (2,944 at the time of writing) and data points.  It is a great resource, but it comes with all the advantages and disadvantages of crowdsourced data.

Methodology

I have gathered the data for the 4 major cities in Bulgaria – Sofia, Plovdiv, Varna, and Burgas.

For my purposes, I haven’t relied on any of the sites above.  I decided to use only local and as reliable data as possible.  House prices and rents come from the largest real estate advertising sites that offers a public database of historical sale and rent prices.  You have to keep in mind that the prices and rents used are off a real estate agency site.  They are not total costs of ownership.  Closing costs, property taxes, insurance, maintenance expenses, and the like are not accounted for.

Calculating disposable income for the price-to-income ratio was quite a challenge.  My search led me to believe that disposable income is not reported by any government or private agencies.  So, I used GNP and population data from the National Statistical Institute (NSI) and tax data from the Ministry of Finance to arrive at an estimation of average disposable income per person in Bulgaria.

As I said, disposable income data for Bulgarian households is hard to come by.  This leads many journalists and analysts to take a shortcut and use total personal income.  I don’t like this approach because, with the exception of the first-time homebuyer tax credit for young families, homes are paid for with after-tax money.  The issue that remains is the lack of data to break down disposable income by city.  This results in price-to-income being overstated in major cities where incomes are the highest but my measure uses the average for the country.  Also, take notice that I am using disposable income per person.  That’s because the definition of ‘household’ can vary significantly.  For example, in the US, I believe, a household consists of 1.5 people.  In Bulgaria, NSI’s definition of a household encompasses all people who live and eat together, and share a budget.

Price-to-Rent and Price-to-Income

These are the two summary ratios that I like.

Price-to-rent resembles the P/E ratio for a stock.  It is the price of the property over how much it earns in a year (12 months of rent).  Its inverse is the rental yield.  It can give you an idea about the valuation of the housing market and whether it may be better to own or rent.  As a rule of thumb, price-to-rent above 21 suggests that it is better for the prospective homebuyer to rent while values below 15 suggest that renting is a better deal.

My graph shows that, for the most part, and currently, housing in Bulgaria has been in the grey area between 15 and 21.  That’s the number of years of rent necessary to buy a home.  House prices peaked in the second and third quarter of 2008 then fell sharply.  But the commensurate decrease in rents kept the ratio relatively steady.  Looking at Bulgaria in isolation, there is no indication of significant under- or overvaluation in the housing market.  However, taking an European perspective, Bulgaria is among the ten countries with the lowest price-to-rent ratios.

Price-to-income tells you how affordable houses are for the locals.  Basically, what the graph says is that affordability has returned to where it stood 10 years ago – between 4 and 6.  What does 4 and 6 mean?  The rule of thumb here is that ratios below 4-5 (below 3 when total personal income is used instead of disposable income) indicate that housing is affordable.

The graph I found on Eureka Report, shows that current house prices to disposable household income in the US is in the low 2s while Canada, the UK, Australia, and New Zealand float around 5.  To make it an apples-to-apples comparison, multiply these values by 1.5 (assuming the average household is 1.5 people).  Heady markets like Australia and Canada get a value of 7.5 while the US – around 3.5.  On this measure, housing affordability in Bulgaria is somewhat below average, especially in Sofia and Varna.  To give some contrast, price-to-income is over 20 in Beijing and Shenzhen.

Conclusion

Bulgarian real estate prices now are around 40% their all-time high in the third quarter of 2008.  Based on the low price-to-rent ratio compared to other European countries and the relative affordability (excluding Sofia and Varna) of housing for the local population, the housing market in Bulgaria should attract investment.  However, the bad economic outlook, the high unemployment rate and the low level of foreign direct investment, which was a major driver of the real estate bubble in Bulgaria, won’t allow this to happen at this time.

Average Sale and Rent Prices in Major Bulgarian Cities 2002-2012

As an aside, I am providing the house price data I am working with in graphical form.  It is pretty granular – split by 1-, 2-, and 3-room properties, by city and district.