From a financial point of view, it is very good to be the owner of the house in which you live. Moldovans like to own property and have a roof over their head... great financial and psychological security in our not so stable economic conditions.
But let's analyze how rational the decisions of Moldovans are and how many emotions they involve when buying a home.
There are 3 basic rules that can help you make a well-calculated decision when it comes to purchasing an apartment or house:
- Buy the home you can afford
- Don't overindebted yourself
- To buy it at a fair price
Rule 1 - Buy the house you can afford
The number 1 golden rule when you want to buy a home would be that the price paid for the property should not exceed the average salary for a period of 5 years.
The average monthly salary per economy in the Republic of Moldova is 11,700 lei - according to official data in 2023. If we consider a family consisting of two people employed in the labor field with an average salary per economy, then the total income per family is 23 400 mdl, compared to the NBM exchange rate, being 1220 euros.
Correct:
1220 euros (average monthly income) x 12 months x 5 years = 73 200 euros (the maximum price of a house that an average family can afford at the moment)
Wrong:
If you live in rent paying 500 euros monthly and this is equal to the monthly rate for an apartment taken on credit, for a maximum period of 30 years, and you think it's ok to go to the bank and access a mortgage loan, well it's not . Why?
Here is a simple calculation:
(500 euros monthly x 12 x 30 years) / 2 = 90,000 euros (maximum price of the home)
You will be tempted to buy an apartment 22,500 euros more expensive than what you can afford - this could be a problem when the crisis hits - see Rule 2 below.
Rule 2 - Don't go into too much debt
Wrong:
Even if the bank offers you a mortgage loan for an apartment whose price is 90,000 euros, it does not mean that you can afford it. The bank accepts a maximum debt level of 40% of your monthly income if you have an average monthly salary in the economy and up to 60% if your average salary exceeds the average in the economy.
In case of unforeseen economic situations and inflation increases - mortgages become more expensive - the monthly rate also increases from 40% to 60% of the monthly income. Thus, you will only have 40% of your income left for living expenses. You will feel a great discomfort and in some cases you will even have to sell the house because you have no way to pay it.
A family with an average income of 1220 euros that applies for a mortgage loan and borrows from the bank at the maximum level of 40% of the monthly income, it will pay in current market conditions approximately 490 euros per month (monthly loan rate). Being forced to limit herself for current expenses (communal services, food, clothes, transport, medicine, etc.) to only 760 euros per month.
If inflation rises and mortgages become more expensive (*Note - Effective Annual Interest - APR increased from 7-8% to 14% in 2022), the same family will have to pay already 600-700 -800 euro monthly installment. This will be put in the situation of supporting itself monthly with only 400-500 euros, a very difficult situation especially in the conditions where all products and services will also become more expensive due to inflation.
Correct:
Precisely because of this, it is better to buy a smaller, simpler home - so that the degree of family debt does not exceed 25-30% of the monthly income. Thus, in crisis situations, even if loans will become more expensive and the monthly rate will double, the family will be left with at least 40-50% of the monthly income for current expenses. A much less stressful situation and much easier to manage financially.
Example:
Average family income 1220 euros per month, debt level 30%, would mean a maximum monthly rate of 366 euros. In the current market conditions, it would mean an apartment you can afford, the price of which is a maximum of 65,880 euros and not 87,840 euros if the degree of indebtedness were at the maximum level of 40% accepted by the bank and you would pay a monthly installment of 488 euros.
Rule 3 - Buy it at the right price
To understand whether it is a fair market price or not, you would need to calculate the return on investment, knowing the sale price and the rental price.
You need to look at similar properties that are on the rental market and see if the total rental cost over a 10-15 year term is equal to or higher than the selling price. Only then can you be sure that it is a fair market price and a profitable investment.
Correct:
Example: we have the same apartment with the price of 65,880, which we know is rented for 400 euros
400 euros x 12 months x 15 years = 72,000 euros (the price of 65,880 is an undervalued one)
Wrong:
But if the rental price is lower and the total amount accumulated in 10-15 years is lower than the current sale price, then the purchase price is not exactly right and you should not get into such a purchase.
300 euros x 12 months x 15 years = 54,000 euros (the price of 65,880 is overvalued)
CONCLUSION
If we take a family consisting of 2 people who work legally and both spouses receive an average salary per economy of 11,700 MDL (total income per family 23,400 MDL or 1,220 euros), the maximum price for a home that they can afford would be be around 65,000 - 70,000 euros.
Taking into account the current market prices for apartments, they could afford either a 1-room apartment in a new euro-repair block in Chisinau, or a 2-room apartment in the Suburbs. Likewise, they could opt for a 1-2-room apartment in a Soviet-style block in Chisinau, and in some cases a 3-room apartment that will require repair.
Author:
Victor Cernomorcenco, Real Estate Specialist within the Acces Immobil company.
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