This paper is based on a wide range of researches and statistics data, regarding the enormous stock real estate boom that started around 1982 and picked up incredible speed after 1995. First of all, many economists argue that this boom represents a speculative bubble, because it is not grounded in sensible economic fundamentals. Secondly, this boom must be placed it in the context of financial crisis starting in 2007. In fact, the global financial crisis has begun with the north-American subprime mortgage debacle in 2007. Thirdly, should monitor the dangerous situation that occurs after a significant increase in real estate markets, and at one time the market drops significantly or long stays. The problems of the real estate sector are placed in the financial crisis and these are explained by following chain - first, the substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well. The main long-run consequence could be a decline in consumer and local business confidence, and another, possibly worldwide, recession. In Romania, all these evolutions are very important for the policy options and actions that should be taken.real estate investments, financial crisis, subprime mortgage

Ana POPA

Laura GIURCA VASILESCU

English

Research Papers in Economics

Year VIII, No. 10/2009                                                                                                  65  
 
THE REAL ESTATE INVESTMENTS AND THE 
FINANCIAL CRISIS IN ROMANIA 
 
Prof. Ana POPA, PhD 
Assoc. Prof. Laura GIURCĂ VASILESCU, PhD  
University of Craiova 
 
 
1. Introduction 
 
The real estate sector in Romania 
has a great importance in the economy 
and banking system as well as in all 
developed economies.  
In 2002-2008 period, the real estate 
investments were the most attractive 
investments for the population, mainly 
due to price developments by 2008. It 
can be said that it has occurred in 
Romania as a phenomenon of 
speculation in the property sector, 
namely the speculative ”bubble”. 
The companies operating in 
construction and real estate sectors fall 
into the "vicious cycle" of economic 
growth – crisis relationship, so that during 
the boom, they have a growing role for 
the economy and banking system, but 
during crisis, any disturbance on the real 
estate asset market is likely to have an 
increasing impact on financial stability. 
In the same time, the crisis in 
Romania is based on two principal 
factors that may constrain the pace of the 
recovery, namely: the restrictive bank 
lending and the weak job market. 
 
2. The real estate ”bubble” and the 
global financial crisis 
 
The wide range of researches and 
statistics data shows an enormous real 
estate stock boom that started around 
1982 and picked up incredible speed 
after 1995.  
First of all, many economists argue 
that this boom represents a speculative 
”bubble”, because it is not grounded in 
sensible economic fundamentals. 
Secondly, this boom must be placed 
it in the context of financial crisis starting 
in 2007. In fact, the global financial crisis 
has begun with the north-American 
subprime mortgage debacle in 2007. 
As of 2006, several areas of the 
world are thought by some to be in a 
bubble state, although the subject is 
highly controversial. As the boom 
progressed, buying prices become high 
(in relation to rents and financing costs) 
in many countries, leading to decisions 
by some buyers to rent instead of buying.  
Mortgage-holders also came under 
extreme pressure as interest rates rose.  
 
Figure 1. Real estate prices in US 
 
 
 
Source: World Economic Outlook, October 2009, 
IFM, p.26. 
 
House prices continue to decline 
across a broad range of economies.   66                                                                         Finance – Challenges of the Future 
An analysis of past house price 
cycles suggests that for most economies, 
there could still be significant corrections 
to come given the stronger-than average 
upturn in house prices that preceded the 
present downturn. Moreover, the global 
recession has put pressure on 
commercial property markets, where 
increasing vacancy rates and decreasing 
rents drove down nonresidential 
construction investment. 
Leveraged commercial real estate 
investors are likely to face difficulties in 
refinancing the loans that are coming 
due, and soaring delinquencies therefore 
have the potential to create a second 
wave of financial distress in exposed 
financial institutions.  
The ongoing effects on the real 
economy of house price corrections and 
increasing stress in commercial property 
markets are being amplified in 
economies where construction has been 
an important contributor to growth in 
recent years, where consumption was 
driven by house price appreciations, and 
where commercial real estate markets 
have been placed in a precarious 
position by the weakening of the real 
economy. 
One such trend might be the rapid 
growth of developing economies such as 
the  BRIC (Brazil, Russia, China, India) 
group. This has caused significant growth 
in monetary reserves and savings in 
those countries, which in turn has made 
possible extension of credit elsewhere. 
The subprime mortgage crisis, with 
its accompanying impacts and effects on 
economies in various nations, has given 
some credence to the idea that these 
trends might have some common 
characteristics. 
The problems of the real estate 
sector are placed in the financial crisis 
and these are explained by following 
chain: first, the substantial increase in the 
rate of personal bankruptcies, which 
could lead to a secondary string of 
bankruptcies of financial institutions as 
well.  
 
Table 1. Announced bank losses 
Periods Total 
Billions of 
US dollars 
Of 
witch: 
Real 
estate 
% of 
total 
T3-T4 
2007 
206.0 3.2  1.6 
T3-T4 
2007 
435.8 55.9  12.8 
T1 2009  93.7 3.0  3.2 
Source: Bank for International Settlements, 79th 
Annual Report, 1 April 2008– 31 March 2009, 
Basel, 29 June 2009, p.41. 
 
The main long-run consequence 
could be a decline in consumer and local 
business confidence, and another, 
possibly worldwide, recession. 
 
3. The trend of the real estate sector to 
the Romanian economy and 
speculative ”bubble” 
 
The evolution from the Romanian 
real estate market was an atypical trend 
in the transition period.  
The real estate market from 
Romania reappeared and developed 
quickly after 1990, with the mention that 
the transactions from the real estate 
market took over the rhythm of legal 
settlement and of international 
harmonization. 
In 1990-2000 periods, the real 
estate assets have a low level price, in 
comparison with Europe, but with a high 
price increase.  
In this period, another problem was 
the manifestation of a demand increase 
underlined by a lack of a supply for new 
constructions and especially by a lack of 
a true mortgage market in the first years 
of transition. In 1990-2000 periods, it can 
appreciate that it was got to the “seller 
market” stage, when the sellers establish 
the prices and the sales. 
In 2001-2007 periods, many 
developers, especially foreign investors 
have increased the supply of the real 
estate market (residential or commercial 
real estate).  Year VIII, No. 10/2009                                                                                                  67  
In 2001-2007 periods, there is a 
sharply increase of the prices, but these 
increase was without any relation 
between the general development level 
or the standing level of houses and the 
market value; with other words, there is 
an unnatural report low quality (most 
constructions was old) – high price for 
majority transactions. 
Prices for residential units in 
projects launched in the first half of the 
year 2007 raised an average of 20%. For 
example, in 2006 the average 
construction price was Є600/sqm and in 
2007 it rose to Є750/sqm. The market 
remained at an average of Є1,500/sqm. 
The lowest average price for a 2-
bedroom apartment in a new project with 
over 200 units stands at about Є 
133,000+VAT(19%) in the western part 
of the city Bucharest. 
Also, in Bucharest, the average 
rents in shopping centers in 2007 
registered levels of Є24- 27/sqm/month, 
decrease of 4% compared to 2006. In the 
rest of the country, there was a slightly 
lower and wider range, of Є15- 25/sqm/ 
month, compared to the Є18- 25/sqm/ 
month in 2006. 
One can appreciate that the year 
2007, especially for residential, was 
characterized as a speculative “bubble”, 
sustained on the active mortgage market 
and easy. 
In 2008, the financial crisis affected 
also the Romanian economy. The 
problems of the real estate sector are 
placed in the financial crisis, and 
Romanian financial system was also 
affected by real estate exposures. 
One of the problem is that Romania 
does not publish official house price 
statistics. General economics statistics 
are offered by National Institute of 
Statistics (NIS) and the National Bank of 
Romania (NBR). 
But, there is different unofficial 
information. For example, Business 
Monitor International has elaborated the 
Romania Real Estate Report. Last 
Report, July 2009,  has been researched 
at source, and features latest-available 
data covering commercial and residential 
construction (value and growth), bank 
lending growth, bank lending rates, 
house price growth, rental prices and 
yields, real GDP growth, inflation, 
exchange rates and other key 
macroeconomic data; 5-year industry 
forecasts through end-2013, company 
rankings and competitive landscapes 
covering leading multinational and 
national Real Estate companies; and 
analysis of latest industry news, trends 
and regulatory developments in 
Romania. 
Also, Colliers International’s annual 
Real Estate Review has prices of 
exclusive, middle and lower classes of 
apartments, mainly in Bucharest. 
 
4. Net Romanian household wealth 
and real estate exposures in the 
Romanian financial system 
 
After 1990, the real estate sector 
plays an increasing role for the 
Romanian economy and the banking 
sector.  
Especially, in 2002-2008 periods, 
the Non-financial assets (including only 
real estate, the most important assets) 
are increased in total net household 
wealth (Fig.2). 
 
Figure 2.Net household wealth 
 
Source: NBR, Financial stability report, Bucharest, 
2009, p.88. 
  68                                                                         Finance – Challenges of the Future 
The wealth of Romanian population  
has increased by over 6 times the period 
2002-2007.  
Financial assets were in late 2008, 
about 15% of the wealth of population 
and non-financial assets remaining 85%, 
including the value of buildings. 
In this period, the real estate 
investments were the most attractive 
investments for the population, mainly 
due to price developments by 2008.  
The real estate sector accounts for a 
mere 1 percent of the overall turnover, 
yet it holds 12 percent (as of June 2008) 
of total assets economy-wide, as against 
3 percent in December 2004. 
Banks’ exposure to construction and 
real estate sectors is relatively high; it is 
on the rise compared to their importance 
in the economy (21 percent of the 
outstanding loans in March 2009); and it 
has a heterogeneous nature as far as 
credit institutions are concerned.  
 
Table 2. Number of finished dwellings, 
by financing sources 
-thou 
 Total  of 
finished 
dwellings 
Private 
funds 
Public 
funds 
2001 27,0  25,3  1,3 
2002 27,7  24,4  3,0 
2003 29,1  22,9  6,1 
2004 30,1  25,2  4,9 
2005 32,9  27,5  3,8 
2006 39,6  34,8  4,8 
Sorces: NIS, Yearbook statistics of Romania, 2007, 
p.276. 
 
As shown in Fig.3, the default rate 
generated by real estate and construction 
companies (3.2 percent in March 2009) is 
higher than the economy wide rate (2.7 
percent, March 2009).  
 
 
 
 
 
 
 
Figure 3. Default rate (excluding 
off balance sheet overdue payments) 
 
Source: NBR, Financial stability report, Bucharest, 
2009, p.66. 
 
Bank loans to companies are 
primarily collateralised by real estate 
assets (about 75 percent of total loans, 
as of March 2009). The default rate on 
these loans has registered a significant 
rise in recent months, particularly in the 
case of the forex - denominated 
component. There does not seem to be 
any difference in terms of default 
behaviour between mortgage-backed 
loans and unsecured ones, the default 
rate is approximately the same, namely 
2.6 - 2.8 percent as of March 2009. 
However, the balance of overdue credit 
reached 9.4 percent in March 2009 
against 3.2 percent in December 2007, 
so that the default rate looks poised for 
an increase. 
Bank loans to households are being 
increasingly collateralised by real estate 
assets (47 percent in March 2009 versus 
42 percent in December 2007). Both the 
default rate and the volume of overdue 
loans have risen considerably over the 
past year, although they remain still at 
manageable levels (the default rate stood 
at 0.32 percent in March 2009).  
Loans collateralised by real estate 
assets in Romania consist of two 
categories: Year VIII, No. 10/2009                                                                                                  69  
-mortgage loans  
-mortgage-backed consumer loans 
 
Table 3. Loans collateralised by real 
estate assets in Romania in 2009 
% 
 Romania EU 
Total, of witch:  100  100 
I. Mortgage loans  42  71 
II. Mortgage-backed 
consumer loans 
58 29 
Source: NBR, Financial stability report, Bucharest, 
2009. 
 
I.Mortgage loans hold a low share 
in total household credit, i.e. 21.7 percent 
as of January 2009). Compared to other 
EU countries, Romania’s situation is 
strongly atypical, which could currently 
prove beneficial to financial stability if 
conditions on the real estate market 
deteriorated further. As a matter of fact, 
the consequences of this risk 
materialising might be less severe than in 
other Member States, because the 
intentions to purchase a dwelling within 
the next 12 months – albeit on a 
downtrend – have stood above the EU 
average since the beginning of 2009.  
The mortgage loans represent 42 
percent of total (as of March 2009). The 
number of mortgage-backed loans in 
Romania is subdued (around 0.3 million 
of 7.6 million loans to households) with 
an average value of about EUR 38,000. 
Mortgage loans account for 71 percent of 
total household credit in the euro area as 
of December 2008. 
II. Mortgage-backed consumer 
loans have seen their share rise to 36.7 
percent of consumer credit as of March 
2009, with the related risk heightening as 
well.  
Mortgage-backed consumer loans 
represent 58 percent of total (March 
2009). These loans do not have a precise 
destination, as they are either 
consumption-oriented or real estate 
investment oriented.  
The default rate has multiplied 
almost ten times since December 2007, 
but its level remains modest (0.42 
percent as of March 2009). 
 
5. Conclusions 
 
In the banks’ opinion, the real estate 
sector, followed by construction, 
witnessed the most visible deterioration 
in credit risk over the past year. 
Atypical, in Romania, although risks 
stemming from real estate lending have 
been on the rise, there are elements 
offsetting the negative influence.  
I. Major risk factors are:  
(i) the large share in company funding of 
loans having real estate assets as 
collateral (adverse developments in the 
value of this collateral could deteriorate 
the quality of banks’ portfolio);  
(ii) a sharp uptrend in the default rate 
(albeit from a low initial level); 
(iii) banks’ large exposure to real estate 
and construction companies.  
II. Risk mitigating factors include:  
(i) the subdued weight (compared to 
other EU countries) of mortgage credit to 
households in banks’ portfolio;  
(ii) the fairly prudent level of the loan-to-
value ratio; 
(iii) the relatively small drop in 
households’ intention to purchase a real 
estate asset over the upcoming 12 
months. 
But, the main long-run consequence 
of the real estate crisis could be a decline 
in consumer and local business 
confidence, and another, possibly 
worldwide, recession. 
 
 
 
 
 
  70                                                                         Finance – Challenges of the Future 
 
 
 
REFERENCES 
Claessens, S., 
Kose, A., Terrones, 
M., (2008) 
“What Happens During Recessions, Crunches and Busts”, IMF 
Working 08/274, December; 
 
Robert J. Shiller 
(2005 
Irrational Exuberance, Second Edition, Princeton University Press's; 
Bank for 
International 
Settlements (2009) 
79th Annual Report, 1 April 2008– 31 March 2009, Basel, 29 June 
2009; 
Business Monitor 
International 
Romania (2009) 
Real Estate Report Published: July 15 2009  Quarterly; 
Colliers 
International (2009) 
Romania 2009, Real estate Review; 
Global Property 
Guide. (2008) 
The end of the global house price boom 
http://www.globalpropertyguide.com/press-relations/; 
Global Property 
Guide. (2009) 
House Prices Worldwide 
http://www.globalpropertyguide.com/real-estate-house-prices/A; 
International 
Monetary Fund 
(2009) 
World Economic Outlook Sustaining the Recovery, October 2009, 
http://www.imf.org; 
National Bank of 
Romania (2009) 
Financial stability report, Bucharest, 2009. 
 
 
  

The real estate investments and the financial crisis in Romania

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