The Covid-19 pandemic that began in March 2020 has caused significant disruption in the Turkish economy and building construction. The exchange rate crisis in H2 2018 resulted in big rises of construction costs and sharp drops in building construction in 2019. In H1 2020 the economy and the construction sector were recovering from that crisis when the pandemic struck.
Written by Prof. Ali TUREL, EECFA Turkey
Building starts in the first six months of 2020 were about 41% up from the same six months of 2019. The government’s subsidy policy to provide mortgage loans under market exchange rates by the three state-owned banks was in effect from the beginning of June to the end of August 2020, greatly stimulating demand for housing and housing transactions. House building starts appear to have gained momentum from the subsidy policy, and building construction permits, dominated by residential buildings, grew by 45,3% in H1 2021. Nonetheless, there is a large backlog of buildings under construction in almost every use.
The hike in the starts of residential buildings is also reflected in their growing share in total building construction permits: 63% in 2019, 76,7% in 2020 and 79,3% in 2021. The share in total starts of commercial and industrial buildings (hotels, restaurants, wholesale and retail buildings, warehousing and industrial buildings) has had a downtrend: 15,1% in 2019, 14,8% in 2020 and 12,5% in 2021, although their starts rose by 42,6% in 2020 and by 23,5% in 2021. The shrinking share of their starts is due to the bigger growth rates in residential buildings starts. Public buildings (transport buildings, schools, research buildings and hospitals) had a 21,9% share in 2019 but dropped to 8,5% in 2020 and to 8% in 2021. Their high share in 2019 might be explained by the huge decline in private sector investments in that year.
Construction forecast for Turkey is available in the latest EECFA Forecast Report Turkey up to 2023 which can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.
Building occupancy permits, on the other hand, had a different trend from that of construction permits. Total floor areas of completed buildings expanded by 2,8% in 2019, while construction permits dwindled by 60,1%. 2020 saw a 32,2% shrinkage in occupancy permits, followed by a 3,3% growth in 2021. And it is a known fact that builders cannot react to market signals during economic crises in a short period of time because of the heavy sunk cost of buildings under construction, particularly of those close to completion.
Builders of residential, commercial and publicly used buildings had almost the same reaction to the crisis caused by the pandemic: the share of these buildings did not alter much between 2019 and 2021. The only notable difference was a slight drop in the share of residential buildings from 79,5% in 2020 to 77,4% in 2021, and a 2% rise in the share of commercial and industrial buildings from 12,6% in 2020 to 14,6% in 2021.
The total floor area of residential buildings and the number of dwelling units completed in H1 2020 and H1 2021 were almost the same, while a 19% growth occurred in the total floor areas of completed commercial and industrial buildings. Housebuilders appear to be cautious in completing construction because of the shrinking demand under the conditions of high mortgage interest rates. Decreased real incomes due to big falls in the value of Turkish Lira against foreign currencies under the effects of the pandemic also contributes to the fall in demand. Mortgaged sales in housing transactions was 18,9% of total sales until the end of July, 2021. First sales have been decreasing during the pandemic from their consistently stable level of 46% to 30% in the same 7 months of 2021.
Housebuilders are also squeezed between the upsurge in building construction cost (42,48% yearly until the end June 2021) and the relatively less rise in housing prices (33% for new housing and 29,2% for all housing) within the same period. The great backlog of residential buildings under construction causes builders an additional cost of delaying completions. Thus, expectations for another subsidised mortgage scheme from the government are frequently raised in the media.
EECFA has again examined the main changes in the prospects between the Autumn 2020 and Spring 2021 Macro Forecasts of the European Commission for those EECFA member countries which are covered by this forecast; Bulgaria, Croatia, Romania, Russia, Serbia, Slovenia, Turkey, plus Hungary.
Written by Bálint Parragi, EECFA Research, ELTINGA
After a severe recession during last year, the global economy as a whole could grow again in Spring 2021, and it is expected to continue doing so. As the first chart shows, GDP in all countries could recover fast and return to an increasing trajectory.
In Autumn 2020, projections showed the majority of the countries in the EECFA region with a stagnating or very slowly increasing economy. This was mainly due to the composition of the 3-year-average comprising a year with a very deep recession, and the two upcoming years with cautious estimations of growth. The only two economies with growth exceeding 1% were Serbia and Turkey (2.3% and 2% respectively) as these economies shrank least in 2020 (-1.8% and -2.5%).
On the other hand, the results are quite different in the European Commission’s Spring 2021 report where every EECFA country registers a positive GDP growth with all of them being at least 0.5%. The order of countries is almost identical to the one in Autumn 2020 and we can see a grouping of countries:
The first one is the group of the highest growing two countries, Serbia and Turkey again. This time, Turkey has a higher average growth, though (+3.7% and +2.8% respectively). The significant growth is the result of the slight contraction (or even growth) during 2020 (-1% in Serbia and +1.8% in Turkey).
The second group consists of countries with a negligible growth according to the Autumn 2020 report (+0.4-+0.7%) but with a more remarkable increase projected in Spring 2021; above 1% in each case and reaching 1.5% in Romania, Hungary, and Slovenia.
The economies in the last category: Croatia, Russia, together with the EU, all decreased according to the Autumn 2020 report, but in the Spring 2021 report it seems that they have better prospects in the future as they may grow to a little extent (+0.5-+1.1%).
When it comes to total investment (gross fixed capital formation) data, two general conclusions can be drawn:
Firstly, the projection in Spring 2021 is higher for every country than the Autumn 2020 values. The upward revision is especially remarkable for Turkey, Croatia, and Romania. This again could mean that economic recovery is expected to be a rapid process.
Secondly, the expected GFCF growth is positive in every country in 2021, except for Russia where it is close to zero. However, the countries are not homogeneous as Romania, Serbia, Turkey, Croatia and Slovenia have an expected growth within 4%-6%, but Hungary, Bulgaria, and Russia, as well as the EU, has a growth smaller than 2% (average of 2020-2021-2022).
Construction investment growth (where available – click the arrow on the chart above) has been revised upward everywhere, but while in Bulgaria it has grown by just 0.4 percentage points, it has multiplied in Hungary, Slovenia and Romania. For the latter, it has even exceeded 8% per annum. Construction’s share in total investment in EECFA countries and Hungary ranges from 55% (Bulgaria) to 64% (Romania), with Hungary and Slovenia in between (62% and 59%, respectively).
All these represents the Commission’s opinion. If you are curious about our opinion on Eastern European construction markets or you need construction forecast on segment level, please consult with the latest EECFA reports. For a sample report and order, visit eecfa.com
EECFA’s 2021 Summer Construction Forecast Report up to 2023 was released on 28 June. Full reports can be ordered here. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.
In the first year of the pandemic the construction market of the SEE region as a whole remained in the positive, and further expansion is expected until 2023. The only exception is Bulgaria where a harsh transition is foreseen for 2023 when the 2014-2020 EU programming period ends financially. The massive growth experienced in the years before 2020 is not anticipated to return; around 3% growth is projected for 2021 and 2022, and a 3% drop for 2023. The countries with the largest cumulated growth on the forecast horizon are Croatia and Serbia.
Bulgaria. After a drop of 4.2% in 2020, the European Commission (EC) forecasts the economy to rebound by the end of 2021 and to grow by 3.5%. Positive economic outlook, combined with low interest rates on home loans, will result in more affordable homes. But increased savings and zero deposit rates raise speculative investments in residential, pushing home prices up. Non-residential construction was expected to decelerate even before the pandemic, but the Covid-19 crisis has accelerated this process. Civil engineering is backed by advancing EU fund absorption and by 2027 will be given new opportunities. After an estimated drop in total construction in 2020 by 1.3% in Bulgaria, 2021 and 2022 are expected to see a growth of 9.2% and 12%, respectively. But a considerable drop of 24% is prognosticated in construction output in 2023 due to the slow preparation for the next programming period and the National Recovery and Resilience Plan.
Croatia. We are significantly more optimistic about output growth in a number of Croatian construction sectors than in our last report. Assistance from the EU and international financial institutions blunted the edge of the three catastrophes that struck Croatia in 2020, the COVID-19 pandemic and the Zagreb and Sisak-Maslovina earthquakes. For most (but not all) sectors, it appears that the catastrophes will not greatly change the drivers of output growth over the medium to long term, although they will have some short-term consequences. The three-year hiatus until the next elections in Croatia and the recent election of a reformist mayor in Zagreb, Croatia’s economic powerhouse, provide openings for spurring Croatia’s economic growth and so construction output, but it is not clear that they will be utilized.
Romania. The economic impact of Covid-19 has been less than initially feared. Investment into construction grew strongly in 2020, preventing GDP from a larger drop, and we expect investment to continue in the following years thanks to the RRF. Recovery is also to be quicker than previously forecasted: the EC forecasts a GDP growth of 5.1% for 2022 and 4.9% for 2023. EECFA’s forecast for 2021 and 2022 in construction output is a small contraction (-0.7% and -0.2%) with growth returning in 2023 with 2.6%. Last year residential developers focused on finishing as many projects as possible as there were concerns of a potential market downturn. It didn’t happen, but the new supply to be delivered in the next years could push prices down under normal market conditions.
Serbia. In 2021 things are getting back to normal with the economy standing strong and having already surpassed pre-pandemic levels. Serbia’s economy was one of the least affected in Europe with GDP contracting just 1% last year, and an expected real growth of around 6.5% this year. Recovery is visible in almost all economic segments except for some service sectors still struggling to reach 2019 levels. Serbia’s weaker exposure to tourism and related services moderated losses during the pandemic, and investment stayed strong in both 2020 and 2021. In addition, the government increased public investments in infrastructure and civil engineering projects. Demand in Europe is also recovering, orders are growing again, and with tourism on the rise as well, there is a lot of reason for optimism in the coming period.
Slovenia. Construction industry and the economy in general was less disrupted by the pandemic than originally expected. While GDP decreased by 5.5% in 2020, it is expected to rebound strongly in 2021. Total construction output stayed at almost exactly the same level in 2020 as in 2019: EUR 3.4bln; and it is prognosticated to increase strongly in 2021 and 2022, and exceed EUR 4.1bln in 2023, for the first time since 2008. An interesting recent development though has been the rise in construction costs in 2021 resulting from high demand and supply disruptions owing to the pandemic and its economic aftermath. However, we estimate that this increase in construction cost will be temporary and will decelerate after 2022.
The worst performer in 2020 in the Eastern region of EECFA was Turkey, but the downtrend here started well before the pandemic struck. As recovery is awaited to start this year in Turkey, the region as a whole could turn to positive in 2021. Expansion is our current scenario for the region with 9% cumulated real growth until 2023. The largest cumulated market growth on the horizon, thanks to the relatively low starting point, could happen in Turkey.
Russia. The economy is coping with the effects of the pandemic relatively well. GDP contraction last year turned out to be less serious than anticipated with one reason being the stability of the construction sector that showed high resilience to the crisis on the back of active government support for the entire industry, the implementation of many transport and energy projects, and measures to support demand for homes. Construction output shrank by 0.9% in 2020 (against the previously expected drop of about 5%-6%). In the short term, the decline is most likely to slow down to 0.3% in 2021 with a transition to active growth in 2022-2023 within 3.9%-3.4% per year, respectively. Optimism for the next two years stems from the expected recovery in housing construction and the continued infrastructure projects in civil engineering.
Turkey. The economy is showing a rebound after the pandemic. The recent months have seen positive rates of change in GDP, industrial production, value added of construction sector, building starts, and completions. However, a weak Turkish Lira against foreign currencies continues to cause inflationary problems to the economy. Producer prices, construction costs and mortgage interest rates have been increasing at rates close to the rise in exchange rates. The government may again adopt the policy of requiring the three state-owned banks to offer preferential mortgage loans. Total construction output in Turkey is estimated to have slumped by 6.9% last year, but this year growth might return averaging roughly +4% all the way through the forecast horizon.
Ukraine. Last year the construction market was marked by the impact of Covid-19 along with internal problems such as the reform of the State Architectural and Construction Inspection, primarily affecting housing construction. On a positive note, the president launched the Big Construction scheme in March 2020 to support construction industry, so we estimate the overall decline to be 2.2%. And although the recession has reduced the investment flow in construction this year, it has increased demand for some commercial segments such as logistics and co-working offices. As the Big Construction scheme will have sufficient funds for this year as well, it gives cause for optimism for now, and Ukraine’s construction market is forecasted to register growth across the board.
Source of data: EECFA Construction Forecast Report, 2021 Summer
Since the start of the pandemic, the activity of construction companies in Bulgaria was hindered by economic uncertainty, the government’s anti-COVID measures and the lack of workforce due to quarantine or illness. Therefore, during the period of March 2020 – March 2021, NSI (National Statistical Institute) data shows that building construction decreased by 8.4%. However, the sector has signs of recovery as in March 2021 building construction production index increased by 8.0% for the first time compared to the same month a year earlier.
Short-term indicators also suggest the improved confidence of investors after the hesitant 2020. In the first quarter of 2021, permitted floor area was 11.0% more than in Q1 2020, and almost 4% more than Q1 2019. The same trend, but with stronger dynamics, is also observed regarding started floor area. During the first quarter, accumulated construction permits resulted in starting of more than 660 000 sqm., which is nearly 25% more than in the corresponding quarter of 2020, and by 5.5% more compared to 2019.
Residential property market
Despite the experienced difficulties, residential construction is remaining in the center of investors’ attention due to the growing residential property market especially in the largest cities (Sofia, Plovdiv, Varna, Burgas, etc.). After the initial withdrawal of buyers in the middle of 2020, it became clear that there would be no evident shift on the residential property market.
Regarding the supply side of the market, 15 623 new dwellings were completed last year (Q2 2020 – Q1 2021), which is 17.4% higher than a year ago and is the highest figure in the last 10 years. Still, this cannot catch up with demand which pushed prices up at the end of 2020 and in early 2021. The number of transactions went up in the first quarter of 2021 by 17% compared to the same quarter of 2020, and it is actually the strongest first quarter in the last 5 years. The ongoing housing price increase intensified after 2015. Since then, the accumulated price growth has been over 41%.
There are several factors contributing to the ongoing process:
Low interest rates on housing loans: last year banks improved the conditions of granting loans. The average interest rate on housing loans in March 2021 is 2.75%, which is historic low. The increasing interest in buying a home resulted in a 6% growth of newly granted loans in the period of April 2020 – March 2021 compared to the same period a year earlier. In Q1 2021, 20% of all deals are financed with bank loans but there are significant differences between cities. In Sofia, where buying a property is the most expensive, nearly half of the deals are financed with the banks’ help. In Varna the share is 32%, while in Burgas and Plovdiv the respective deals are 30% and 25%.
Low deposit rates: interest rates on deposits are close to 0% as in the last months some banks started to refuse taking new term deposits, which shifted people’s savings into real estates as the most reliable option.
Speculative investment: investors’ invest in acquiring properties in early construction stages with intentions to re-sell after the completion, which generates additional demand, and increases prices. Additionally, the growing profitability of the real estate market attracts the savings of people working abroad who look for investment opportunities in their country of origin.
Residential construction forecast is available in the EECFA Construction Forecast Report Bulgaria that can be purchased on eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.
Written by Dejan Krajinović, Beobuild Core D.O.O., EECFA Serbia
During the last six years, between 2015 and 2020, our forecasts closely followed the significant turnaround in Serbian construction, which rolled out into one of the strongest growth cycles in recent history. The powerful surge in construction outputs surpassed all initial expectations, and there are a number of converging factors behind its formidable result. The recovery after the recession gradually transformed itself into a fully-fledged construction boom, which more than doubled Serbia’s construction outputs, from EUR 2 billion in 2015 to EUR 4 billion in 2019. Even the pandemic in 2020 didn’t change the very positive outlooks, although it did cause a slowdown and negative consolidation of construction outputs by some 5% at constant prices. The expected growth should return in 2021 and all indicators are still on the side of our initial forecast.
How ‘good’ is EECFA’s Sample Report? The 3 charts compare our 3 forecasts for total construction output at constant price as 2014=100 index. Forecast figures are dotted, factual figures are solid lines.
The chart on the left shows our first forecast for 2018. It was published in June 2016 and this is our sample report. (See the full PDF and the corresponding XLS file.) The factual 2018 figures were published in the 2nd half of 2019.
The chart in the middle is our forecast issued in Winter 2019, where the 2018 figure is therefore the final one. 2018 factual data are very close to what was foreseen in June 2016.
The chart on the right is our latest forecast, including the 2019 factual figures, which was published in the meantime. Although we were very optimistic for 2019, the final results turned out to be even better.
Reforms as a prelude
With political changes in 2013, Serbia embarked on a reform path that is slowly proving to be one of the main pillars behind its success story. The initiation of the ongoing cycle happened with the new permit laws implemented in 2015, but this was also followed by new and flexible labor laws, as well as a number of smaller legislations. The new permit laws and the introduction of e-permits made administrative processes very fast and transparent, where the World Bank ranked Serbia in the Top 10 most efficient permit systems in the world. These were critically important legal reforms, which laid ground for investments in practically all construction segments. The reforms started in deep austerity, with tough fiscal reforms including linear pay cuts, halt in state funding and the cancellation of all government programs affecting construction. At the time, it would be impossible to see all the implications we see today, particularly the speed of overall changes.
Tango of public and private
What came as a new strength for this cycle in 2017 was the removal of the austerity measures after the successful fiscal consolidation. Not only public debt was reduced, and budgetary deficits closed, but the Government funds are returning as one of the major contributors in construction. This is a key factor in infrastructure, but also in various public buildings and residential construction. With all weaknesses and possible risks involved, it was very easy to underestimate the scale of the recovery. While an amazing performance of civil engineering was largely expected, the results in the construction of buildings came as a pleasant surprise. Only between 2016 and 2020, the levels of output in building construction almost doubled. The total amount grew from EUR 900 million in 2016 to EUR 1.7 billion in 2020, with a strong contribution of residential, commercial and industrial sub-segments. The star performer is the residential segment that pushed us to make several upward revisions during the last 5 years, as permits consecutively broke all expectations.
In 2020, the positive effects of the boom affected literally all construction segments, and the brewing activity continued even during the pandemic. Already in the second half of 2020, the situation stabilized, and investments were desperately waiting for a full normalization. Permit numbers recovered, land and home sales returned to pre-pandemic levels and none of the investors cancelled their construction start. The overall economy is a strong supporter of the property market and conditions have been improving year by year. Most foreign investments went into manufacturing, giving a strong foundation for a sustained economic growth in the coming period. During 2020, Serbia’s GDP fell only 1.5% compared with 2019, while exports and investments continued to grow. This means we can expect a strong rebound of the economy in 2021, where GDP is expected to grow between 5%-6%. Similar growth rates are expected in 2022, as well.
By not being a member of the European Union, Serbia was unable to access EU development funds for stable financing of its transport and other civil infrastructure. For years, the regional infrastructure was neglected, until an old friend came to the rescue. In 2009 Serbia signed a strategic cooperation deal with China, which provided full financial and logistical support in infrastructure development. The first project started in 2011 and since then, projects Serbia contracted with China have been worth over EUR 10 billion, including motorways, high-speed railways, energy, and public utilities. The Sino-Serbian partnership has been growing by the years and beside preferential development funds, it now covers a wide cooperation in various interstate projects, from education to security. Chinese companies also invested several billion of euros in the Serbian industry, including mining, metallurgy, electric and home appliances, car parts, etc. We can expect this cooperation to deepen further in the coming years, with even larger-scale projects and investments on the horizon.
How much steam in this cycle?
This is not an ordinary construction cycle, at least not in its length, potency or context. Although, construction output levels were on their historical bottom when the cycle began, its size and distribution prove this is a farther-reaching process. Such a strong recovery in construction levels is indicating an economic shift, which could produce a sustained expansion in the coming years. It can be expected for Serbia to reposition itself as a leading regional economy, and construction outputs to continue breaking historical records. While some of the construction sub-segments will eventually mature and consolidate, the overall trend in total construction figures will maintain an upward direction for several more years. The huge and long-delayed civil-engineering projects will lead construction growth in the forecasts, but buildings shouldn’t fall too much behind. The basis for growth in the construction of buildings is also strong, but its trajectory will be less pronounced and more cyclical.
Current forecasts are showing the cycle will continue until 2023, with a particularly strong performance of civil engineering. Major civil sub-segments will be roads and railways, but other transport infrastructure and energy will also likely break new records in the coming period. Building construction should decelerate its growth rates and even top this cycle in some segments, but the overall trend is to remain positive. We expect the residential segment to maintain its growth rates until 2023, while the non-residential one will probably consolidate in 2021 and return to growth in 2022. It is possible that this cycle can even surpass the current estimates in some scenarios. A lot of external factors can affect mid-term forecasts, so it still remains to be seen how it will all play out.
Written by Dr. Ales Pustovrh – Bogatin, EECFA Slovenia
Construction output in Slovenia decreased by two-thirds between 2008 and 2015 as the effects of the global financial crisis lingered and the Slovenian banking system needed restructuring. Early signs are showing that the pandemic will have much less impact and might even prove to be beneficial to the construction sector in 2021 and beyond.
In 2008, the Slovenian construction reached levels it had never reached before since the country became independent. According to EECFA’s research, its total construction output exceeded EUR 4,6 billion in that year, which as we know now, was unsustainable. Construction output decreased for the next 8 years and embarked on a low of EUR 2,2 billion in 2016 before rebounding to an estimated EUR 3,4 billion in 2020.
Then Covid-19 struck and the whole economy entered another crisis. With lockdown measures and restrictions to the physical movement of people, including workers, it was possible that construction would once again feel the burden of a general economic crisis that might force it into a full depression. In practical terms – how can construction workers construct new projects if they are not even allowed to work in groups on site?
After some initial confusion, it quickly emerged that Covid-19 will not have the same effect on the industry. Construction was able to continue its operations unhindered. Unlike in the Great Recession, banks have kept crediting new construction projects and at very low interest rates. Disposable income of the population has not decreased due to generous anti-crisis measures supplementing the lost income. And the government was willing to run large budget deficits as it was able to borrow at virtually zero cost on international bond markets. A part of these financing was invested in different construction projects, including in health building constructions.
Additionally, a fragile coalition of centre-left parties under Prime Minister Sarec fell apart in Spring 2020 and was replaced by centre-right coalition under the new Prime Minister Jansa. His agenda is also based on implementing some long-stalled construction projects, including the new high-voltage electricity distribution network connection with Hungary and the start of the construction of the new hydroelectric power plant near Mokrice. Some previous large construction projects have been continued or even accelerated, including the start of the construction of the so-called 3rd national road axis, as well as the planned expansion of the Slovenian railroad network that would capitalize on the ongoing construction of the new railroad connection toward Port Koper.
With these big-league construction projects and numerous smaller, privately funded ones, initial data on construction output in 2020 show that instead of decreasing, it might have actually slightly increased even during the health emergency and the accompanying economic recession. Additionally, with strong economic rebound predicted for the time after the emergency, potentially as soon as in the second half of 2021, construction output might grow further.
EECFA’s Winter 2020 forecast is envisioning for Slovenian construction a 0,3% real growth in 2021 and 1,7% in 2022, but with an upside potential.
Segment-level construction forecast is available in the EECFA Winter 2020 Construction Forecast Report Slovenia that can be purchased on eecfa.com
The new government has presented an ambitious long-term plan for civil-engineering, health and nursing home construction for the next few years (although it implementation will greatly depend on the results of the next election in 2022).
It will also have plenty of financing available from the comprehensive EU Recovery Plan. In Slovenia’s national recovery and resilience plan, the European Commission has confirmed access to EUR 5.2 billion for the 2021-2027 period. All in all, it is becoming clear that unlike in the previous crisis, access to funding for construction will not be a problem this time.
Written by Dr. Sebastian Sipos-Gug – Ebuild srl, EECFA Romania
One year later.
In January 2020, the World Health Organization started issuing the first warning of a novel coronavirus emerging, and on 26 February the first case was confirmed in Romania. Measures taken to try and contain it led a state of emergency and a lockdown introduced on 16 March. One year later, we can look back at how the residential real estate market reacted to the pandemic and the economic crisis that accompanied it, and we can make an attempt to understand where the market might go next.
To start with, prices on the residential real estate market in Q1 2020 reached their highest value in the past decade and an unease started to permeate the market with flashbacks to the 2008 credit crunch and the massive drop in prices and transactions that followed. This made many developers rush to complete projects before the market collapse, a trend we described in a previous blog post.
Prices did indeed start to drop slightly by Q3 2020, but they remained at a level higher than that of the previous year and by the end of the year the early indicators pointed to a return to growth. This has been pointed out in other markets as well and seems to have impacted a large number of developed and developing economies. However, each country is different, and in the case of Romania, albeit some of the causes of this phenomenon are shared, the outcome and forecast might be different.
Residential forecast is available in the latest EECFA Construction Forecast Report Romania that can be purchased on eecfa.com
Everything is relative and so are prices.
One can wonder if these prices are too high, and if they might grow further or if we’re looking at a potential bubble that will burst in the near future. We previously addressed some of these questions in (yet) another blog post.
Since then, the main factors have changed in light of the pandemic, but it might still be useful to look at the same ratio between income and home prices that we analyzed then and bring it up to date. In 2007, the average net monthly income could buy you approximately 0.20sqm of an average located two-room apartment. By 2017, when we last ran this test, one could buy 0.46sqm with the average wage. For 2019 and 2020 alike, our estimates place this indicator at 0.50sqm and so home prices relative to income actually seemed to be relatively stable.
Why some prices were expected to fall and why they haven’t.
While in general there might be a plethora of reasons for residential prices to drop, in the case of the pandemic-related economic downturn we were initially looking at several factors, somewhat similar to those we saw in 2008, such as unemployment, lower income, higher mortgage default rates, stricter lending criteria, higher interest rates and/or a rush to sell off properties by underfunded developers. In the case of the pandemic, some of these did indeed happen:
Employment did indeed decline between March and November 2020, but only by 2%-3% compared to the same months of the previous year (source: NSI). This was largely due to the employment protection measures taken by the government, which provided incentives to furlough personnel rather than firing them.
Average income rose during the pandemic. Even in April and May, the months worse hit by the lockdown, net wages actually grew by 2% over the same months of 2019 (source: NSI). This was also maintained by the furlough scheme that provided payments of up to 75% of wages for the employees of companies affected by the pandemic.
Loans past due declined. By November 2020, the share of loans past due in total loans was 4.83%, down from 5.46% in November 2019 (source: NBR). Granted, this is still far from the 1.24% average we saw in 2008 but is well within the general descending trend of the previous three years. There was some government support in this segment as well, with the possibility of postponing loan repayments for those negatively impacted by the pandemic, and some banks also took their own measures in this direction.
Lending criteria and interest rates. Lending conditions remained relatively stable while interest rates for mortgage loans declined slightly by November 2020 over November 2019 (-0.5pp, source: NBR). This was partly due to the impact of the tax change in late 2018 that raised interest rates in 2019 over their trend and was later reversed.
Developers had a more secure line of financing. While during the previous recession in 2008 a lot of development was carried out through credit, by early 2020 many properties under construction were pre-sold, and down payments on these provided the necessary cashflow to continue building and even wait longer to find buyers in order to sell at a better price.
Furthermore, due to the reduced spending possibilities with the shutdown of non-essential travel, in-restaurant dining and entertainment venues, spending habits changed. Despite income slightly growing (on average), the saving rate went up and thus by end 2020 the population had a lot more money saved on their accounts, even if the term deposits didn’t go up as much. This high level of very liquid capital can be used to fund residential investments, be it renovation, construction or purchasing a new home.
Where the market is heading.
The longer-term trend of price increases on the residential market continues to be the most likely scenario as demand continues to outpace supply in many of the larger cities like Bucharest or Cluj Napoca. Some potential events would bring merit to a more pessimistic outlook:
Changes in employment and income might be ’ticking bombs’. As said, a lot of the market stability is due to government intervention in preventing mass unemployment and ensuring a minimum income. Once these braces come off, there are genuine concerns that the labor market might see a correction, which would have a negative impact on the residential real estate market. The risk of this is somewhat low, though, since a large portion of those furloughed have returned to work (with some notable exceptions in the hospitality industry), but a small correction could still happen.
Medium- and long-term changes in work trends. With the surge in remote work due to the pandemic measures, one can wonder if this would lead to more structural changes in the way people work in the future. If remote work becomes more common for a significant proportion of people, this will have a massive impact on the residential market. It would lower demand in large cities and increase it in metropolitan areas and smaller cities. This would be somewhat limited in the case of Romania, though, as the country still has relatively large economic segments being less prone to remote work such as manufacturing and construction.
We are already noticing some changes in home buyer preferences. After spending more time at home, either in lockdown or from working at home, home buyers now focus on larger homes, preferably with a yard or at least a large balcony.
Case in point: Cluj Napoca.
Taking Cluj Napoca as an example, the local real estate market is seeing massive demand increases as young people, mainly in the IT field, move to the city to study and take up work. They enjoy higher-than-average income and living in the city gives them proximity to various entertainment and services options, access to a booming labor market, entrepreneurship, and business opportunities. But they also have some major downsides: high rents and residential prices that chip away at their income, gridlocks, light and noise pollution and many other disadvantages of living in a city. With the advent of the work-at-home scheme, they might be more interested in relocating to homes in the neighboring rural area (even more so than they are now) and thus retain a higher share of their wages without the downside of commuting. This would put less pressure on the residential market in the city itself, and lead to lower rents and prices. The city thus becomes less interesting for developers and construction might slow down.
Despite the pandemic, home prices are seemingly growing. While this might seem strange at first, the actual impact of the current recession on home purchases is limited since the average individual still has their job with a similar or even higher income and is actually spending less of their income on goods and services and thus can afford to save for a down payment.
In the shorter run, the market shows some signs of overheating, but is far from brittle. If the pandemic recovery turns out to be lengthy and there are major changes in the way work is done, it could limit prices and drive them down temporarily. However, if you are holding out in buying a home waiting for prices to collapse, you might be in for a bit of a disappointment.
The 2020 Winter EECFA Construction Forecast Report was released on 8 December. Full reports can be purchased, and a sample report can be viewed at www.eecfa.com. EECFA (Eastern European Construction Forecasting Association) conducts research on the construction markets of 8 Eastern-European countries.
Building construction markets of the Balkan EECFA countries as a whole have shown resistance during the pandemic so far. Nonetheless the region is foreseen to have yet another negative year in 2021, before expansion can return in 2022. As the current EU programming period is nearing its end, civil engineering is expected to be the driving force in the upcoming period, well outperforming building construction. The total construction market is projected to side move in 2021, and 2022 could bring a growth of around 4%. Based on its priorities, the NextGenerationEU recovery fund is also supportive for both building construction and the civil engineering sub-markets. Its specifics (for what and when) on country level are yet unknown, though.
Bulgaria. The expected economic recovery should bring the Bulgarian economy back to pre-crisis levels by end 2022 with both exports and consumption contributing positively. Having it in mind, the future of residential construction remains positive despite the economic uncertainty. In short term, purchasing power should be affected, but in general, demand for new housing projects in big cities should remain. Non-residential construction will also be held back by dropping demand for commercial and hotel projects, and the projected slow and uneven economic recovery. Civil engineering in the future should be driven by EU funding as well as by the national budget. After major growth in total construction output in 2019 (+19%), 2020 will likely see a drop of 4.9%. Approaching the end of the programming period in 2021 and 2022, total construction will likely increase by 4.4% and 5.2%, respectably, in real terms.
Croatia. The effects of COVID-19 and the Zagreb earthquake on the Croatian construction industry will vary greatly from sector to sector. Thanks to swift, massive EU financial assistance, some sectors will even benefit from the disasters. These sectors include civil engineering generally and especially those CE sectors in which projects can be implemented rapidly. For buildings sectors, results are mixed. Some were harshly battered and will take years to recover. Others barely felt the catastrophes’ consequences. With few exceptions, the trends that underlay buildings sectors’ growth before these events will remain the primary drivers of buildings output in the medium and long run. In the short term, disaster-relief spending will benefit some.
Romania. Pandemic impact on construction was felt less strongly in 2020 since ongoing projects were not halted and thus the market slightly grew (3.8%). With the entire economy taking a few years to recover after the 2020 crisis, total construction output in Romania should drop in 2021 (-2%) and start recovering in 2022 (+2.8%). The pandemic will water down the housing subsector next year as fewer-than-expected new projects began this year and the recession should also continue to reduce purchasing power. In non-residential, retail and hotel were battered most. Office construction is in hiatus due to lower demand for new construction with the expansion of work-at-home scheme and with businesses rethinking the use of traditional offices. The drop in international trade set back industrial construction, but as borders open and exports start picking up, recovery may come too. Civil engineering is the brightest spot with an estimated growth in government investment as 60% of the EU funding for infrastructure is still unspent from the 2014-2020 budget.
Serbia. The developments in 2020 are marked by the reoccurring pandemic and during the year, movement restrictions were introduced twice, having a very negative effect on all service sectors. Furthermore, it is now certain that pandemic effects are to extend into 2021 and the best-case scenario means the economy will take the entire 2021 to recover. With still large uncertainty looming for next year, the forecast still carries a lot “ifs” and the government spent over 10% of GDP for various stimulus measures aiming to mitigate the effects of the interruptions. While the recovery in the second half of 2020 was strong, the new restrictions in October and December again impacted developments and stopped the normalization. Luckily, the realization of big public infrastructure projects has been steady and growing, which has helped growth in construction outputs, and private investments are still not subsiding. Strong credit activity and market fundamentals are also supporting recovery, but lingering foreign demand and slow recovery in the service sectors continue to dim the prospects.
Slovenia. Construction industry was less disrupted by COVID-19 that some were fearing. Even though construction output is estimated to have dropped by 4.8% this year, it will likely rebound next year close to the 2019 level and should expand further in 2022 on the back of civil engineering where big projects are continuing apace. The Second Railway Track to Port Koper, the Third Axis Road construction and the Karavanke Tunnel expansion all continued in 2020 and were less disrupted by the lockdown than expected. Non-residential construction, on the other hand, will suffer from the lingering effects of the economic slowdown caused by the pandemic and the consequent lower investment in industrial and commercial segments. Similarly, residential construction is subdued for the time being due to the pandemic but may return to growth path towards the end of the forecast horizon based on historically low interest rates and good availability of credit financing.
Dragged down by Turkey, the decline in buildings construction started in the Eastern region of EECFA as a whole well before the pandemic struck. And 2020 is also expected to see a negative year. From 2021 on recovery could start, but the level of 2018 is not projected to be reached on the forecast horizon. The civil engineering submarket of the region also contracted massively already in 2019 and further decline is our scenario for this year. From 2021 on this submarket could turn to positive and we are optimistic for 2022 as well. Total construction market of the Eastern region is forecast to grow by around 3% in each of the upcoming 2 years.
Russia. This year has seen several negative factors blasting construction industry in Russia, and the economy, such as falling oil prices, the devaluation of the rouble at the beginning of the year, and the pandemic with its related lockdown and restrictions. This caused a massive decline in real incomes, a deterioration in investment climate and a downturn in business activity. One way or the other almost all construction segments felt the pain and decline in total construction by end 2020 is to be 5.8%. It is better than our summer 2020 predictions, though; the government’s economic recovery plan turned out to be quite effective and allowed us to slightly improve our forecast. Return to growth in construction is possible already in 2021 (+0.3%), and by end 2022 a much more confident positive dynamics (+4.1%) is expected based on the likely recovery trends in all segments on the back of state support and the launch of big infrastructure projects.
Turkey. The economy was marred during the 3 months after COVID-19 appeared on 11 March in Turkey. Anti-COVID measures put in place caused massive declines in industrial production, including construction, and in GDP. Lifting most measures and introducing a subsidy offering soft loans by the three state-owned banks on 1 June 2020 served as an important stimulus for the economy and the construction sector. Together with a historical peak in housing transactions in July 2020, building starts began to grow, although there is a big backlog of construction in almost every sector. Rising inflation and construction costs owing to the depreciation of the Turkish Lira against foreign currencies would be the primary concern for the construction sector in 2021.
Ukraine. Construction this year showed a negative trend compared to last year. After a relative growth in Q1 2020, there was a significant dip in Q2, followed by a gradual recovery in Q3-Q4. Nominally, at end Q3 construction reached last year’s indicators in the volume of works performed, but with inflation considered, the drop is still 2%. In the same period last year, construction showed a rise of 23.5%. Key negative factors this year are the COVID-19 crisis and the reform of the State Architectural and Construction Inspectorate that started almost simultaneously with the lockdown in early spring. As a result of falling population incomes and complications in obtaining construction permit, the volume of housing construction slumped. Civil engineering fared well thanks to a state program and the redirection of part of the money from the Covid Fund into the subsector.
Source of data: EECFA Construction Forecast Report, 2020 Winter
Written by Michael Glazer (SEE Regional Advisors) and Tatjana Halapija (Nada Projekt), EECFA’s Croatian members
It’s at last becoming possible to assess the consequences for Croatia’s construction sector of the country’s July 2020 elections. Jockeying for governmental positions, COVID-19- and tourism-season-related priorities and other pressing matters prevented the new Croatian Democratic Union (HDZ) led government from moving on its larger agenda until recently. Now, though, the political picture, and the impact of the elections on Croatia’s construction sector, is getting clearer.
The July elections were particularly important to the Croatian construction sector for a number of reasons. They occurred mid-COVID-19-pandemic, when a change in government or even just a change in government policy would have had large consequences for Croatia’s fight against the disease and so for public- and private-sector finances and accordingly for the resources that would be available in the next few years for construction projects. This was especially true as the elections were called in the midst of Croatia’s tourism season, a critically sensitive time, as the survival of the country’s hospitality sector, which is responsible for much of Croatia’s building construction, was at stake, and relatively soon after the Zagreb earthquake, which caused on the order of EUR 12bln in damage to the city’s buildings and infrastructure that must be repaired.
Making the elections still more consequential, they seemed likely to decide the fates of several political parties and movements, some with significant influence on Croatia’s construction sector, as well as those of a few individually powerful politicians important to that sector. Finally, they also seemed likely to affect Croatia’s relationship with the new EU Commission and EU Parliament, relations determinative of the amount and nature of EU COVID-19- and earthquake-related aid that Croatia could secure.
So, how have things turned out? Regarding winners and loser, the center-right HDZ was by far the biggest winner (increasing by five the number of seats held by its coalition in the one hundred fifty-one seat parliament) and the center-left Social Democratic Party (SDP) the biggest loser (with its coalition’s seat count falling by ten). Far-right defectors from the HDZ did well as a new party (securing sixteen seats), but paradoxically lost power, since the HDZ’s strong performance made them irrelevant to the formation of an HDZ-led government.
The consequences of the HDZ victory are mostly positive for the construction sector. Importantly, there will be substantial continuity in the government’s construction policy. While by no means certain, it’s possible that a victory by the SDP and its coalition could have led to months of fractious conflict within the coalition, and indeed within the SDP itself, and put in power a party that after many years out of government might no longer have been familiar with how to rule.
As to the policies that the new government will adopt, further simplification of bureaucratic procedures relating to construction is likely, as is a continued emphasis on large infrastructure projects and COVID-19- and earthquake-damage amelioration measures. Crucially as to the latter, Andrej Plenković, Croatia’s prime minister both before and now again after the elections, has great pull with the European Commission, since he played a major role in brokering the selection of Ursula von der Leyen as the Commission’s president. (In fact, von der Leyen, while EC president, made a controversial video supporting Plenković’s candidacy, for which she later apologized.) For the same reason, he has similar influence with the European People’s Party, of which the HDZ is a member. These relationships have very likely already been reflected in the large sums that the EU proposes to allocate to Croatia for earthquake and COVID-19 relief. They probably also mean that the EU will be more flexible in how Croatia spends the money that it receives for these purposes. All good news for construction in Croatia and in particular for civil engineering projects.
Construction forecast for Croatia is available in the EECFA Forecast Report Croatia that can be purchased on eecfa.com
Also important to the construction sector is the dramatic decline of the Croatian People’s Party (HNS) as a national political force and the eclipse of its leaders. The HNS kept only one parliamentary seat and no ministries. The party’s formerly extensive influence on energy matters is now very much past tense, and its members are being gradually removed from positions of power in Croatian state-owned enterprises, a process likely to be accelerated by the arrest of the CEO of JANAF, Croatia’s gas pipeline company, who was formerly a HNS member is said to still be close to that party. The result is likely to be a better alignment of Croatia’s energy policy with its policies in other spheres. In particular, it will likely lead to a construction program for electrical-power facilities more in keeping with Croatia’s energy needs than with its government’s political makeup.
Other developments have been less positive. The HDZ has not followed through on some of its electioneering promises. One important one is that the number of Croatian sub-sovereign administrative divisions would be reduced from the present 428 municipalities (the smallest of which has 137 inhabitants), 128 cities and twenty counties to a more sensible number. The cost of maintaining so many governmental organizations is quite high, with, for example, a mayor, municipal secretary, administrator/bookkeeper, etc. required for each municipality and city not to mention the offices, office cleaners, doorkeepers, official automobiles and the like. that lead to even more expense. It appears, though, that the internal political cost of rationalizing Croatia’s local governments, which would be a painful task for a government of any political stripe, is too high for the current one, and so significant reductions in numbers and payrolls are unlikely. The rub here is not just that Croatia’s surfeit of local governments is expensive and leads to corruption. It’s also that reduction in their number and related reforms are high on the priority list of the EU. So a failure to follow through on the promised reforms could lead to friction in the release of EU funds, including construction-related money.
The new government has also scored some own goals with its post-earthquake and anti-COVID-19 policies. As to its response to the devastation that the earthquake wrought in and near Zagreb, promised relief has been slow in coming, and the legislation governing it was not well drafted. While matters are now being clarified, funding delays have caused real suffering for those whose residences and offices the earthquake rendered unsafe.
As to the COVID-19 pandemic, the prior HDZ government’s success in the spring in tamping down COVID-19 infections eroded dramatically in the summer and fall. Daily infections are now at record levels, likely a result of lax enforcement of preventive measures in the summer (to accommodate tourists and electioneering) and continued lack of enforcement into the fall (reflecting public resistance to inconvenience and a loss in confidence in the government figures leading Croatia’s COVID-19 response). The upshot may be a weaker tourism season in 2021 as travelers no longer see Croatia as safe. This would in turn hurt the hotel construction sector directly and, because tourism is such a large part of the Croatian economy, many others indirectly. A failure to get COVID-19 back under control could also have other, nearer-term economic consequences through mounting health-care costs (including those relating to the disease’s long-term consequences) and worker absences due to self-isolation and disease symptoms. The latter absences could be quite prolonged given COVID-19’s effects.
Budgetary problems, including those alluded to above, are another problem facing the new government, and only a few of them are of its own making. Income and value-added tax receipts are down dramatically. Combined with the pandemic support payments needed to prevent massive unemployment and company failures, these shortfalls have blown a large hole in Croatia’s budget that the government has covered by borrowing. Earthquake relief and further COVID-19 measures will exacerbate the budgetary problem, and borrowing more is not a viable solution. While Croatia has been promised substantial EU aid, indeed more on a per capita basis than most EU members, it’s still not clear when that aid will arrive or how fast the government can disburse it once received. Progress at the EU level in this matter has so far been slow, and the consequences could be severe for all Croatian construction sectors, including civil engineering, if it does not speed up soon.
All in all, the outcome of Croatia’s July elections is likely the best that the country’s construction sector could have hoped for. Policy continuity, experience in governing and good relations with the EU are essential to Croatia at the present time. By triggering reform and renewal in the SDP, the elections may even have laid the groundwork for a more competitive, and hence more responsive, political environment in Croatia, which would also likely be a positive not just for the country, but for the sector.
The economic turmoil of 2020 is hammering real estate and construction, but its degree is not the same across Russia. We saw this happening during the 2008 and 2014 crises, and we are watching it right now. Tracking the situation on the real estate markets of large Russian cities, we see that the dynamics of market indicators in crisis periods have always been different in various cities under the same external conditions, and different regional real estate markets react to macroeconomic shocks in different ways.
Written by Ilya Volodko and Andrey Vakulenko – MACON Realty Group, EECFA Russia
The 2020 crisis and regionality in Russia
While the past crises were mostly of macroeconomic nature, the crisis in 2020, in addition to the macro component such as falling oil prices and the ruble’s volatility, has a strong local component: different regimes and periods of lockdown measures due to the pandemic and the variety and unequal effectiveness of regional measures to support businesses and the population. Because of this, the current crisis affects local real estate markets even more asymmetrically.
One of the main influences on the degree of penetration of the crisis into the largest cities of Russia will be exerted by the structure of their economies because the degree of damage caused by lockdown and other measures to combat the pandemic on different sectors is mixed. To analyse these differences, we have used data from the Institute for Urban Economics Foundation on the structure of the economy of Russian cities and the volume of the Gross Urban Product (GUP).
To understand how strongly a metropolitan economy reacts to the crisis, MACON consultants have assigned a stability coefficient to each metropolitan economic sector (classification according to the Brookings Institution methodology), depending on its vulnerability, recovery rate and predicted consequences. Coefficient 1 means the greatest stability/no influence, 0 means the least stability/complete or partial temporary liquidation of the industry:
Local/non-market services. Stability coefficient 1. The most stable sector, including state and municipal services, education, health care, social support, culture and art, recreation, etc. Its volume is set to remain or increase due to additional indexation or one-time/permanent support measures.
Manufacturing. Stability coefficient 0.8. Despite a possible decline in output and employment, the sector is sufficiently stable as severe lockdown measures do not apply. Since these are large businesses, they receive the greatest support both directly (financially) and through government orders, tax incentives, subsidized interest rates and easier access to debt financing.
Utilities. Stability coefficient 0.8. They remain fundamentally resilient to the crisis. They are negatively affected by shrinkage in business activity, which is offset by the rise in consumption by individuals, many of whom still work remotely. Yet, the difference in tariffs for individuals and businesses is hurting earnings.
Commodities. Stability coefficient 0.7. It includes mining, agriculture, forestry, hunting and fishing. The impact is more significant, the dynamics of commodity prices has a negative trend. But given the large volume of employment, the traditional volatility in these markets, and the non-stop nature of many extractive industries, the sector is most likely to continue working and maintain basic employment in mid-term.
Construction. Stability coefficient 0.5. A major negative impact due to the industry’s high dependence on any macroeconomic fluctuations, as well as with the multiplier effect, due to which even a slight decrease in construction volumes causes great changes in related industries. But the nature of the industry guarantees a considerable degree of state support and hence stability.
Transportation. Stability coefficient 0.5. The sector contracted due to both direct factors during the lockdown (almost complete elimination of air traffic, reduction of railway transportation, prohibition of movement within cities, between municipalities and regions), and indirect factors during the lockdown (reduction of wholesale and retail trade turnover). Yet, the need to ensure commodity logistics preserves industry volumes at an acceptable level.
Business/Finance. Stability coefficient 0.4. One of the most vulnerable sectors of the metropolitan economy, including financial services, insurance, real estate and new technologies (science and technology). It is characterized by a great drop in business activity and a decrease in physical access to such services.
Trade and tourism. Stability coefficient 0.1. The segment of retail and wholesale trade, catering, hotel and conference services is the most affected in the current crisis due to the impossibility of carrying out such activities during the lockdown. It is aggravated by the low ability of the sector to recover fast, the simplicity of liquidation procedures, the lack of access to credit and inadequate state support.
Based on data on the structure of metropolitan economies, as well as the above estimates and stability coefficients, it is possible to compile a ranking of the largest Russian metropolitan areas in terms of the degree of resistance to the crisis, where the first place/highest value means a higher degree of stability.
The metropolitan areas of Perm, Chelyabinsk and Saratov demonstrate the greatest stability. In these cities, on average, more than 60% of the economy is accounted for by the 3 basic sectors: local/non-market services, manufacturing, utilities. These are either fully controlled by the state/municipality or have a major systemic/city-forming character allowing them to receive benefits that contribute to the preservation of employment and production.
The metropolitan areas of Moscow, St. Petersburg, Krasnodar and Yekaterinburg turned out to be the least resistant to the crisis. The share of the 3 basic sectors (local/non-market services, manufacturing, utilities), in contrast to the leaders, is much lower here: on average 45% versus 63%. However, the share of Business/Finance and Trade and tourism sectors, which are the most vulnerable in the current situation, is much higher (42% versus 23%). But while Moscow and St. Petersburg, due to broader financial opportunities, can offset these factors with active financial, tax and other support of the population and businesses, non-capital cities do not have such a resource.
We have found that the poorer the city, the more stable it is in the current crisis. The paradox is that Russian metropolitan areas that actively developed before the current crisis with a great deal of financial, business services, improved construction market and IT-technologies are in a much more difficult situation today than those with an economic structure from the pre-digital era and with industrial enterprises and non-market services.
For construction forecast on Russia, consult the latest EECFA Forecast Report Russia that can be purchased on eecfa.com
Construction and resilience
The different resilience to the crisis in various cities has a direct consequence on the segments of the construction market. Apart from the obviously severely affected office and retail, the most indicative is housing where demand reacts rather quickly to macroeconomic shocks and changes in the external environment. The number of housing transactions in Q2 2020 compared to Q1 2020 decreased in most Russian cities and regions owing to the dropping income of the population, the restrictions on movement, and the temporary impossibility of state registration of transactions. However, the most pronounced decline in demand was precisely in the cities with the least crisis-resistant economies which experienced a bigger increase in unemployment and a much bigger reduction in general business activity and a decrease in household income.