Households Financial Behaviour, Housing Market and Credit in SEE Debora Revoltella UniCredit Group CEE Chief Economist Euromoney Conference, Dubrovnik October 17 th

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

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 Regions GDP investment grade Sep 2007 > BBB- 81.7% Sep 2004 > BBB- 36.0% 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' 18.3% 'BBB' 36.0% 'BB' 64.0% Real GDP growth Risk profile – S&P rating weighted per GDP (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 Per cent of households Personal Consumption growth (2000=100) 1 Ownership of consumer goods 2 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 Network Note: (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 *Gross financial wealth minus the non-mortgage component of debt SEE 1 household financial behaviour (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 period Source: UniCredit Group New Europe Research Network Accumulation of net financial savings Household financial behaviour by country 1 Accumulation of net financial and real wealth 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 quality 2 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 ratio 1,2 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 INTENTION TO BUY NEW REAL ESTATE General likelihood to buy a house/flat INTENTION TO BUY NEW REAL ESTATE Purpose 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 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 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 ( ) Actual house prices vs equilibrium (%, 2006) 3 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

12 High potential for the mortgage market in the region. We forecast a 24% per year growth in Housing loans ( bn) Housing loans (CAGR 06-09) Housing loans 1 (% 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 Bulgaria Croatia 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 Banking loans represent the main source of financing for new residential property investment Methods to finance house/flat purchase 2 Mortgage market development in SEE (CAGR and % of GDP) 1 (CAGR and % of GDP) 1 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