Households Financial Behaviour, Housing Market and Credit in SEE

Debora Revoltella

UniCredit Group CEE Chief Economist

Euromoney Conference, Dubrovnik October 17th

2

EXECUTIVE SUMMARY

The SEE region continues to deliver strong growth with moderate risk

The households sector as a driver of growth – households are consuming and investing in their house, while net financial savings remain relatively stable compared to GDP

The residential housing market continues to show opportunities. Home ownership is high but potential is related to quality improvements

Our survey data show demand potential for new housing construction and renovation – mostly as primary house, but some evidence of demand for investment or secondary house

Rapid increase in residential real estate prices still compatible with the convergence story

High potential for the mortgage market in the region. We forecast a 24% per year growth in 2007-2009

3

AGENDA

SEE households’ financial behaviour

Housing market in SEE: current trends and future opportunities

4

The SEE region continues to deliver strong growth with moderate risk

GDP growth in SEE is well above EU

Significantly improved risk profile: 82% of the Region’s GDP investment grade

Sep 2007

> BBB- 81.7%

Sep 2004

> BBB- 36.0%

+45.7 pps

Note: SEE: Bulgaria, Romania, Croatia, Bosnia & Herzegovina and Serbia Source: UniCredit Group New Europe Research Network

‘ BBB’ : Croatia, Bulgaria, Romania ‘BB’: Serbia(1) For Sep 2007 S&P ratings, GDP as per end of 2006 For Sep 2004 S&P ratings, GDP as per end of 2003

'BBB'

81.7%

'BB'

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2002 2003 2004 2005 2006 2007 2008 2009

SEE

EU-12

18.3%

'BBB'36.0%

'BB'64.0%

Real GDP growthReal GDP growth Risk profile – S&P rating weighted per GDP Risk profile – S&P rating weighted per GDP (1)(1)

5

The households sector as an engine of growth -- fast convergence to international living standards behind dynamic growth in consumption

Note: (1) SEE: Bulgaria, Croatia, Romania, Bosnia and Serbia; (2) From EBRD “Life in Transition Survey”Source: UniCredit New Europe Research Network, Eurostat

0

20

40

60

80

100

Internetaccess at

home

Computer Mobilephone

Secondaryresidence

Car

CEB

SEE

Per cent of households

Personal Consumption growth (2000=100)Personal Consumption growth (2000=100)11

70

90

110

130

150

170

190

210

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

SEE

EU-12

Ownership of consumer goods Ownership of consumer goods 22

Strong consumption is driven by households’ wish to reach the same living standards of their richer Western European neighbors…

…in the context of increasing disposable income and easier access to the credit market

6

Source: UniCredit Group New Europe Research NetworkNote: (1) SEE: BG, HR and RO

Households are consuming and investing in their house, leading to relatively unchanged net financial saving positions

Household behavior

Bank

Consumption

Saving/ Dis-saving

•Working Income

•Rents

•Credits

0%

20%

40%

60%

80%

2000 2001 2002 2003 2004 2005 2006

Financial wealth Financial liabilities

Net financial wealth Corrected net wealth*

*Gross financial wealth minus the non-mortgage component of debt

SEESEE1 1 household financial behaviourhousehold financial behaviour(as a percentage of GDP)(as a percentage of GDP)

7

Significant differences among countries, in terms of financial deepening and of households financial behaviour

In Bulgaria and more recently Croatia, emergence of new savings flows is adding to the accumulation of wealth (financial and real)

Investment of savings in real assets is slightly crowding out accumulation of net financial wealth in Serbia

In Romania, individuals are increasingly betting on the convergence process benefiting from brisk macroeconomic prospects, rapidly expanding their standard of living

Note: (1) CEE 9: BG, HR, CZ, HU, PL, RO, SI, SK and TK; for Serbia, only deposits and bank loans are included in the definition of wealth and debt, respectively; percentage changes for Serbia refer to 2003-2005 periodSource: UniCredit Group New Europe Research Network

Accumulation of net financial savings

Household financial behaviour by countryHousehold financial behaviour by country11

Bulgaria

Croatia

Romania

SerbiaCEE-9

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-10% -5% 0% 5% 10%

Change in net wealth % of GDP (2002-2006)*

Cha

nge

in c

orre

cted

net

wea

lth %

of

GD

P (2

002-

2006

)*

Ac

cu

mu

lati

on

of

ne

t fi

na

nc

ial

an

d r

ea

l w

ea

lth

Accumulation of net financial savings

8

AGENDA

SEE households’ financial behaviour

Housing markets in SEE: current trends and future opportunities

9

Relatively high home ownership in SEE, with market growth opportunities related to quality improvement

Indicators of housing qualityIndicators of housing quality22

As a result of mass housing privatization and subsidy program for housing during transition, home ownership rates are comparably high, especially in SEE countries

Pre-1990 house building legacy has left unique housing stocks in SEE of relatively young, but often rundown homes with limited internal and neighborhood amenities and poor insulation

Dwellings size are also smaller than in the rest of the region, with an average of 2.7 rooms and 60 sqm of living space

Home ownership ratioHome ownership ratio1,21,2

0

20

40

60

80

100

BG RO HR SRB PL HU CZ SK AT DK FI FR IT ES

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

SEE CE EU

0

10

20

30

40

50

60

70

80

90Avg number of rooms

Avg useful area (sqm) - RX

Note: (1) Owner-occupied dwellings over total occupied dwellings; (2) Census data (last available year); SEE: BG, HR, RO, SRB; CE: PL, HU, CZ, SK; EU: proxy incl. AT, DK, FI, FR, IT and ES. Source: UniCredit New Europe Research Network / Department of the Environment Heritage and Local Government (Ireland) ‘Housing Developments in the European Countries 2005’ / Statistical Office of the Republic of Serbia

10

Our survey data show demand potential for new housing construction and renovation – mostly as primary house, but some evidence of demand for investment or secondary house

Source: BA-CA Market Research

6 11 4 6 7 77

9

48 5 10

65

75 4

7

80 7585 81 84

76

0

10

20

30

40

50

60

70

80

90

100

CEE avg RO BG SRB BiH HR

Yes in next 3 yrs Yes in next 10 yrs Maybe after 10 yrs No

88 82 86 87 88 81

56

7 9 38

44

6 3 6 82 7

1 0 3 3

0

10

20

30

40

50

60

70

80

90

100

CEE avg RO BG SRB BiH HR

Main place to live Investment (to rent)

Secondary house Other

INTENTION TO BUY NEW REAL ESTATEINTENTION TO BUY NEW REAL ESTATEGeneral likelihood to buy a house/flatGeneral likelihood to buy a house/flat

INTENTION TO BUY NEW REAL ESTATEINTENTION TO BUY NEW REAL ESTATEPurpose of new propertyPurpose of new property

Despite high home ownership and lowering affordability, almost 15% of interviewed people are expected to seek for new housing investment in the next 10 years

Demand for house purchase comes mostly from individuals who do not currently own a house or want to improve their living standards, but some evidence of investment or secondary house demand

11

Rapid increases in the residential real estate prices still compatible with convergence story

0

20

40

60

80

100

120

140

Bulgaria Croatia Romania Serbia

Note: (1) Equilibrium prices are calculated based on out-of sample estimation by regressing real house prices on GDP per capita in PPS and mortgage rates using Eurozone countries as a benchmark; for RO, PL, EE and CZ the starting year is 2002, while for SK and LT 2004; (2) Average yearly growth 2003-2006 for EE, PL, RO and SK; (3) As of 2005 for Serbia: house prices in Serbia and Croatia refer to newly completed dwellings, while for Romania and Bulgaria to average of old and newly built one. Source: UniCredit New Europe Research Network

Actual house prices vs equilibrium (2000-2006)Actual house prices vs equilibrium (2000-2006) Actual house prices vs equilibrium (%, 2006)Actual house prices vs equilibrium (%, 2006)33

High growth rates in house prices do not necessarily reflect an out-of-equilibrium pattern of development, but rather adjustments from a low starting level

Transition specific factors together with fundamentals have affected the rapid rise in housing prices and the timing of these increases

Some undervaluation of prices compared to their theoretical level still persist in the SEE region, except for Croatia

Serbia

Bulgaria

Croatia

Czech Rep.

Estonia

Hungary

LithuaniaLatvia

Poland

RomaniaRussia

Slovakia

0

20

40

60

80

100

120

0 5 10 15 20 25 30 35 40

Growth rates 2001-2006 (real terms)2

Act

ual

pri

ces

vs e

qu

ilib

riu

m (

2000

)1

12

High potential for the mortgage market in the region. We forecast a 24% per year growth in 2007-2009

2006 Housing loans (€ bn)

Housing loans (CAGR ’06-’09)

Housing loans1 (% of GDP)

Notes: (1) CEE: BG, HR, CZ, HU, PL, RO, SK, SI, TK; / (2) Real estate Survey 2007 Source: UniCredit New Europe Research Network, BA-CA Market Research

65 68 70 61 5777

13 12 1615

11

818 7

2023

7

15

3235

20 30

23

15

61

1

154

0

20

40

60

80

100

120

140

CEE avg RO BG SRB BiH HR

Bank loan Sell old falt/houseGifts/Heritatge SavingsOther (Building Societies)

0%

15%

30%

45%

0% 5% 10% 15% 20%

BulgariaCroatia

Romania

While the penetration in Croatia has already outpaced that in CEE countries, mortgage lending in the other SEE countries started only some years ago

Rising demand backed by further increases in income level, search for improving quality and increasing value of real estate will continue to boost mortgage financing, accounting for 1/3 of new flows expected in the SEE region in 2007-2009

Banking loans represent the main source of financing for new residential property investment

Methods to finance house/flat purchaseMethods to finance house/flat purchase22Mortgage market development in SEEMortgage market development in SEE (CAGR and % of GDP)(CAGR and % of GDP)11

CEE

13

EXECUTIVE SUMMARY

The SEE region continues to deliver strong growth with moderate risk

The households sector as a driver of growth – households are consuming and investing in their house, while net financial savings remain relatively stable compared to GDP

The residential housing market continues to show opportunities. Home ownership is high but potential is related to quality improvements

Our survey data show demand potential for new housing construction and renovation – mostly as primary house, but some evidence of demand for investment or secondary house

Rapid increase in residential real estate prices still compatible with the convergence story

High potential for the mortgage market in the region. We forecast a 24% per year growth in 2007-2009