The agent’s point was that, as a result of joining the EU, Ireland had gone from being one of the poorest countries in Europe to being one of the richest, and property prices in Dublin had gone through the roof as a result. Surely the same thing was going to happen in the capital cities of the new Eastern European entrants as well?
With hindsight, these agents weren’t exactly wrong, but they weren’t exactly right either.
Prices did go up for sure, and anyone buying property in Prague or Budapest, for example, would have made a tidy profit if they had got into the market at that time. However, the reason was different from the promised ‘Dublin Effect’.
The reason why property prices went up so fast in 2003 and 2004 was very close to the old Wall Street proverb of ‘buy on the rumour, sell on the news’. It was the speculative buying frenzy before EU accession that led to the gains, not as a result of great economic improvements afterwards. In fact prices in Prague and Budapest plateaued shortly after accession.
This shouldn’t have been too much of a surprise to anyone who thought about the situation logically. Ireland was a tiny country compared to the size of the EU as a whole. Just a small part of the EU budget going into Ireland was able to make a huge difference. But when the ten new members of the EU joined all at once, adding a population of 70 million to the EU compared to Ireland’s 4 million, it should have been obvious that the effects upon each of the Eastern European countries were going to be substantially diluted, although certainly highly beneficial in the long-term.
The next EU related factor that the sales agents are getting excited about is entry into the Euro, a feat that only Slovenia has managed to achieve so far. Despite agents’ best efforts, Slovenia’s adopting the Euro on 1 January 2007 doesn’t seem to have had a huge effect upon property prices, probably due to the fact that prices there are already pretty expensive.
Next is the turn of Malta and Cyprus to join the Eurozone on 1 January 2008 which, again, the agents are making a big song and a dance about.
However, there’s another big change in Eastern Europe happening on 1 January 2008 which no one really seems to be talking about so much, yet which I personally believe could have a bigger impact upon some property prices than Euro entry. This is the enlargement of the Schengen zone to include Lithuania, Poland, the Czech Republic and Slovakia.
The Schengen area constitutes a border-free travel zone within the EU among the old member states, with the exception of Great Britain and Ireland. Non-EU countries, such as Norway, Iceland and Switzerland are also included in the Schengen zone.
Currently, whenever you cross the border from one Eastern European country to the next, or from any of them into Western Europe, you need to go through passport control. Not really a major problem on long journeys, but not something that you want to go through on a regular basis, week in, week out, on shorter journeys.
From 1 January 2008, all this will be changed, and the only notification that you are leaving one country and entering another will be the ‘Welcome to …’ signs.
So how could this affect property prices?
Across most of the region, the answer is probably not a huge amount:
Lithuania: Faster entry into Poland. Not so much difference in property prices either side of the border. So probably not so much difference.
Poland: Easier access into Germany. But it’s Eastern Germany, which is not where the money is. So again, probably not a major factor.
Czech Republic: The southwest of the country borders the rich Bavaria area of Germany. The problem is that the areas on both sides of the borders are mountainous and depopulated. Nuremburg is 65 miles from the border; Munich is over 100, so it’s not really commutable. Maybe there will be a few more Bavarians who would be interested in summer cottages in the border regions, but a round trip of this length takes such a time that the time savings by not having to stop at the border are fairly insignificant.
The situation on the Czech Republic’s southern border with Austria is quite similar – mountainous and depopulated for the main. The South Eastern corner of the country might see some slight gains. Breclav, for example, is 45 miles from Vienna and has a direct rail route, so it could be interesting. The Czech Republic’s number two city of Brno is a bit further away – 70 miles. That’s pushing it a bit for a daily commute though.
Which leaves one big winner from the Schengen entry and that is … Slovakia!
Or, more precisely, its capital, Bratislava.
In terms of property prices though, the two cities are worlds apart. Prime city centre property in Vienna is currently going for EUR3500. The best new developments in Bratislava are exactly 50% of that – at EUR1750.
I just can’t see that this situation is going to last forever. Sooner or later, prices in Bratislava are going to start catching up with Vienna (which looks far from overpriced itself and is showing steady growth). Once it gets more easy to commute from Bratislava to Vienna, more Slovaks are going to start working there earning a much higher salary than they would be able to do so in Bratislava, and they will start using that money to start buying decent apartments back home.
Conversely, poorer Austrians could decide that they would get a lot more for their money in Bratislava (although this is less likely due to the fact that not many Austrians speak Slovak, whereas many educated Slovaks will speak German).
Even without entering the Schengen zone, all of Bratislava’s prospects were looking great already, with Slovakia’s low taxes attracting a lot of inward investment into the country such as Kia, leading the country to be dubbed ‘the Tatran Tiger’. Add to this the fact that prices are still among the cheapest in Europe, that rental yields are among the highest in Europe and that Slovakia is currently on schedule to adopt the Euro in 2009 and it’s hard to find a single negative about the city.
Click here for a more detailed look at the current state of the Slovak property market.
For the best potential, look for high-quality developments on the west side of the Danube – the closest side to Vienna, and I’m pretty sure that you’re on to a property with some of the best potential for growth in Europe at the moment.