“Towards which version of a credit risk calculation would you advise an average family to move on: 20 years with 8% interest or 30 years with 5%?”

Part 2

• to read part 1, click here
• to read part 3, click here
• to read part 4, click here
• to read part 5, click here
• to read part 6, click here
• to read part 7, click here

On Tuesday, 6^th of July I had given an online interview to www.hotnews.ro, the number 1 news site of Romania. I was replying live to the readers' questions and after this I also gave a short recorded video interview. You can access this interview here.

Today I present to you the second part of this interview.

"In the end of 2010 and during 2011 we will enter into the period of foreclosures. Then we will reach the minimum prices"

"In 2008, Ilias Papageorgiadis – A real estate player in Romania – was warning that property prices in Romania are inflated. Few people would stop from the madness of buying and selling at huge prices, most of them having contracted a loan in this regard. Now although the market is totally blocked, many owners and developers kept their prices high. Ilias Papageorgiadis Ilias a former journalist from Greece, talks on-line about the futureof the real estate market in Romania.

Ilias Papageorgiadis will answer our readers question

Question no. 3 Flrn

The market will reach the level of 2007 when lending will return to the 2007 level, because the price is determined by the ratio between offer and demand and the correct price is the price which an interested person is willing to offer. Few people have cash now, and even fewer of them are willing to spend them, the banks do not grant loans so the prices still have to drop. I have some questions:

1. What is the real difference between the required price in an add and the real price for which an apartment is sold in reality? An average percentage please.

2. Which will be the price tendency of the lands around Bucharest? If you could please mention the trends in the North, South, East and West, especially from the development point of view of infrastructure and facilities in the area.

3. I have the opportunity to invest in a new "real estate bubble'' – I mean the eastern states of the former Soviet Union, where our history is repeated not only regarding the prices but also in the permissive loan conditions which seem to put the local market on flames. Which is the ideal period to keep a property before re-selling it?

Ilias Papageorgiadis

1. Above all, we don't  know who posts the adds. Is it the real owner, is it the broker the owner is working with or is it just another "very serious" person who saw the add and published it again changing a little bit the figures? Unfortunately I cannot give you a percentage, because there are owners who are still asking price three times higher than the actual ones. This is why you should finally learn to collaborate with serious experts whom you will pay seriously and they will consult and protect your interests. The period in which anyone could make anything in the real estate market is subject of the past.

2. A friend of mine has a property in the area where a road will expand. He tried to sell the property but the market offered him a low price. Thank God that the law of expropriation in Romania is still wrong and the Romanian state is very rich – so he received an offer from the state to sell his land at a much higher price than the market offered him. The state is blocked due to existing laws, when someone can block the construction process on a land if the agreed price offered for expropriation does not suite him. For this reason, the state pays more than the market in order not to be blocked. (I cannot believe that authorities have a friend in the area and they want to pay him more). Now tell me what is the price and what should I say? Basically, most prices will continue to drop, reaching the real price offered by the market, except the areas where infrastructure exists. I cannot generalize and say a price for the whole area: each property has its price. You have to find an expert to tell you the right price.

3. First of all, congratulations! Finally you will understand all the fears and risks that a foreign investor experiences in Romania. You will feel how it is to meet ten people out of which seven are eager to empty your pockets without any remorse. And maybe you'll understand why so many foreign investors fear Romania right now. When we invest in a foreign country, we must identify the risks of that country and draw the expected profit. If you expect  a profit of 20% in Romania, you could go to France for a profit of 10%, if you go to Georgia – a country where the war ended  two years ago we should expect a higher return, let's – say – 50%. Because I'm not very smart, I cannot tell you the appropriate time when to sell. But I can tell you that you should establish a profit target. And when you reached the target, you should sell without being greedy and expect a higher profit. The experience in Romania taught us that all those who have not sold in 2008 for profit, regret now.

Question no. 4 Popescu

1) Is there any connection between the installment for an apartment purchased through a loan and the rent paid for the same apartment? (In general they are equal, not equal, can be in any relationship?)

2) Towards which version of a credit risk calculation would you advise an average family to move on: 20 years with 8% interest or 30 years with 5%?

Ilias Papageorgiadis

1. If rent is 200 euro per month and the installment is 400 euro per month and your salary is 600 euro per month, do not buy. Stay with rent. When buying your first home, the rate should be as close as possible to the amount of rent you pay for the same apartment.

2. Assuming that a family pays about 30% of their income for rent or installment from an average salary of 3,000 lei (1.500 lei each), results an installment / rent of 1,000 lei, about 240 Euro. A loan for 30 years with 5% interest rate results to a paid amount of 45.000 Euro. A credit for 20 years with 8% interest rate means a paid amount of 30.000 Euro.

The answer is very simple: Now – when the prepayment fee has been drastically reduced – you should borrow on a longer duration (30 years with 5% or for 40 years with 3% if you will find).Whenever you gather money you can go earlier and pay in advance without having to pay a penalty. If you have a total salary of 1,500 lei per month, do not buy an apartment. It is not for you. Please do not begin with the story "but I deserve to have a house'', because I say this for your own protection.

In the last phase of the housing bubble in the United States, they were selling apartments to people with so low incomes that they were not able to pay the installment. The outcome? They were living a few months in an apartment which they thought they own, and then lost their apartment and ended up sleeping in tents. It is not worth to risk our life just to own a property. You can say that I am stupid, because I should say to you "Buy, buy, buy." But not everything is for everyone. Especially now in the time of crisis, is more than clear, the installment should not exceed 30% of your monthly income.

If I were you, I would deposit in a bank the amount of installment equivalent for one year, so – in case I will lose my job – not to end up desperate at the banks door but to be able to keep my apartment. If you want a property, you will definitely succeed, but at the right time. If you think you are smarter than everyone else I wish you good luck!

Tomorrow:

"It's been about a year and a half since the housing bubble has burst though there are still some attempts of rough handling by all newspapers with some articles like "prices are only 1100-1200 E now / sqm … you should buy. …………. It is the historical minimum …."

Step by step all blocks in Bucharest degrade and surpass their obsolescence period. All installations require changes and the offered comfort is precarious. However the prices do not drop below 55.000 Euro for a two room, 55 sqm apartment..

What keeps the prices continuously so high?

What is the justification for higher prices than 600 Euro / sqm for any flat  type ''cell'  more than 30 years old? The demand adjusts  the offer so we can deduce that if no demand the offer does not adjust itself? The prices simply froze and thousands of small speculators who play on market got drunk with cold water?

Do you consider the following prices correct:

25 000 Euro for a  studio of 50 sqm

About 40 000 Euro for a two room apartment of. 70 sqm?"