OREANDA-NEWS. The speed of house price rises in the EBRD region over recent years is probably unsustainable in many countries and some moderation in house price growth is likely as housing supply improves and credit conditions tighten in coming years, the EBRD says in its Transition Report 2007, which will be available to the general public from Tuesday, November 13, 2007.

The Report adds that any major house price declines could have a significant economic impact.

It notes that a slowdown in price rises is primarily likely to affect investment in construction. The effects on consumption are likely to be relatively limited, the Report said, noting that mortgage debt/GDP ratios are still low on average in the transition region.

However, it also noted that household financial liabilities in relation to total household wealth have already surpassed eurozone levels in several countries, with mortgages representing a significant share of these liabilities. The lack of other household financial wealth, which could act as a buffer to sustain consumption, is a cause for concern.

The Report said, “How households react to larger declines in house prices, leading to negative equity, is largely untested in the transition region and so there may be a significant impact on the real economy."

Real price increases have been the highest in Ukraine, followed by Romania, Latvia, Estonia, Lithuania, Bulgaria, Russia and Armenia, running at an average growth rate of more than 20 per cent per year, well above real GDP growth.

Price increases have been concentrated in large cities and coastal areas.

According to estate agents, similar developments are apparent in a number of countries in south-eastern Europe (SEE), Central Asia and the Caucasus.

For other transition countries, such as Hungary and the Slovak Republic, the rise in house prices has largely been in line with or below income growth. This follows an earlier period of strong growth in house prices, partly linked to EU accession. The recent period of slow or negative growth, for example in Hungary, reflects adjustments in housing supply.

The Report said the rapid rise in house prices and the timing of these increases reflected factors linked to the process of economic reform. At the start of transition, state housing was sold to occupiers at no or very little cost, which probably led to an initial undervaluation. The huge improvement in the quality of recent residential construction was likely to also have influenced house prices in recent years.

In addition, the increased presence of foreign banks with a focus on households, an increase in bank competition, and improvements in legal systems had increased the availability of mortgage financing.