Bulgarian Cash Purchase Ban Pumps Up Real Estate Market
Monday, January 11, 2010

The Bulgarian real estate market was one of the star performers in Europe between 2005 and 2008, particularly along the Black Sea coast, which has seen untrammelled development accompanied by soaring land and apartment prices; but of course the market fell along with others during 2008 and early 2009, perhaps reaching a bottom in the spring of 2009, when prices were reported to have returned to 2007 levels, with cash buyers able to secure further discounts of 15% or 20%.

With low levels of taxation (10% on income of both individuals and companies) and stamp duty on real estate transfers of between 0.1% and 3%, there is not the temptation to hide the property transaction gains that exists in many countries; nonetheless, cash has been a favoured way of paying for at least part of real estate purchases – until, that is, the government decided to ban its use in order to bolster tax revenues and increase transparency in a market which was becoming unruly.

This plan, which was due to go into effect as of January 1, 2010, has had the not unexpected effect of causing a spike in the market in late 2009. The number of deals in the final quarter of the year is reported to have been at three times the rate of the rate in Q3.

Under the new rules, all purchases have to be made by bank transfer, supervised by a notary and with the involvement of a new government financial institution, the State Depositary Bank, which will guarantee completion of deals subject to payment of a deposit – a similar system to the one that exists in some other European countries, and which effectively prohibits fraud. Horror stories abound of cash purchasers who have found themselves without legal recourse when the properties they thought they had bought turned out to have been resold.

Although the amendment to the Notary Act was given a first reading in parliament, it will not have its second reading until February at the earliest. Iskra Fidossova, Chairperson of the Legal Affairs Committee, says that in all probability it will come into effect in May or June.

This news, together with the sudden completion of many deals that were in the pipeline, will presumably have a deadening effect on the market in the early part of 2010. The most resilient sector is said to be that for higher-quality apartments and villas, where Russian and Romanian interest remains strong. Cheaper properties along the Black Sea coast are more vulnerable, with many British and Scandinavian buyers affected by recession at home putting recently-purchased properties on the market, a scenario which has also unfolded in other holiday and expat destinations such as Spain, Cyprus and Malta.