The real estate market in Slovakia has been going through a more difficult period in recent months. House prices have risen significantly in 2021 and 2022, leading to reduced housing affordability for, for example, young families or low-income groups. However, very affordable interest rates at the time played in their favour. At that time, it was possible to get a loan for less than 1% interest.

Astronomical house prices and the general unfavourable economic development started to regulate banks. There has been an increase in the price of mortgage loans. Today, at the beginning of 2023, the average interest rate on new mortgages is 4%. What people – especially homebuyers – could afford at the turn of 2021 and 2022, they can no longer afford today in terms of monthly loan repayments. It is therefore appropriate to reflect on what level property prices should fall to in order for the market to level out, get back to a stable level and make housing more affordable again.

Even though, according to several expert sources, the market price is already falling slightly, I looked at the problem in concrete numbers.

In the assumptions, I am assuming an average interest rate of 4% today compared to 1%, which is where the rate was at the turn of 2021 and 2022. The interest rate trend can be found HERE.

I used a €200,000 property as an example, where I assume that the client takes out a mortgage loan of 80% of the purchase price. He should have €40 000 in cash at his disposal. This is 20% of the market price of the property. At a 1% interest rate, the monthly repayment of this loan was €514.62 (loan maturity 30 years). If I assume today’s 4% interest rate, the monthly payment will be €763.86, which is very financially burdensome for many families today.

My analytical reasoning led me to the conclusion that for people to buy on the same or similar terms as a year ago, house prices would have to fall by 25%. If we assume that the buyer in our sample example still has €40,000 available and would like to have the same monthly loan repayment, the price of the property would have to be €150,000. For a similar repayment as in the past, at today’s interest rate, he would only get a loan of €110,000. I realize that this drop is a rather large financial loss for the seller. However, the current situation is causing discomfort for both sellers and buyers. A possible way out of this situation is a compromise – splitting 25% of the difference between the seller and the buyer. The ideal way for a seller today to fulfill his desire to sell and a buyer to fulfill his need to buy is a reduction in the price of the property of approximately 12.5% and the buyer’s willingness to pay 12.5% more than he expected. The buyer will thus pay a higher loan repayment of approximately 130€ per month and the seller will lose 12.5% of the purchase price.

The alternative for the buyer is a lease

If the buyer still finds this increase unacceptable, the option of postponing the decision to buy and opting for a rented apartment comes into consideration.

In the sample example I will consider a rent of approximately 600 € per month (the price does not include utilities and taxes). The client will spend the saved €25,000 (12.5% of the purchase price he would have had to pay extra when buying a €200,000 apartment) in 3 and a half years in the rental relationship. After this period, the following can happen:

The price of the property will remain the same – in this case it was not worth going into a rental relationship as he spent €25,000, whereas with his property he would have already paid off the principal of the loan

The price will go up – in this case it was certainly not worth it to rent, as today he would have bought the property even more expensive and consumed 25 000 €

The price will fall – the price would have to fall by more than €25,000 for the client to consider the development of the situation as positive

From these assumptions, I feel that as long as the client is set and wants to buy, I certainly support that. But it all depends on his financial situation and priorities. It is important that he thinks in advance and correctly designs a monthly mortgage payment that he will be able to manage even if his income drops for a while. This prevents you from getting into an unpleasant financial situation and having to give up the property at a loss.

I encourage buyers to manage their financial situation wisely and take advantage of a generous buyer-friendly market. I believe that a reasonable agreement between the buyer and the seller can lead to a compromise that will be beneficial to both parties. The seller will receive a purchase price approximately at the 2021/2022 turn of the year prices, when prices were already very high and the buyer will buy well and fulfill their housing need.