Bulgaria 1997 Hyperinflation and Real Estate Market
This article was written by Alparslan Mesri, NisanurOzbey, Aslı Tolaman.
INTRODUCTION
In that article, we talked about the possibility of hyperinflation in the world and as a result, we mentioned that this is not impossible even in leading economies, but it is a significant risk in emerging economies.
In this article, we will examine one of our thoughts in the example of the 1997 Bulgarian hyperinflation. This idea is that when inflation becomes hyperinflationary in hyperinflationary markets, the real value of the real estate market will collapse and it is reasonable to invest and buy real estate at a cheap price during this collapse.
This idea first came to mind when we were studying the Weimar Republic. There, too, there was a collapse in the real estate market at the peak of hyperinflation. However, the world and economies have changed a lot since the Weimar Republic. Do the same dynamics persist when it comes to the real estate market and inflation? To find the answer to this, it is useful to take a look at more recent examples. One of these examples is the 1997 Bulgarian example. Undoubtedly, the example of Bulgaria will not prove to us a definite rule. Still, it will certainly increase our insight into the link between inflation and the real estate sector.
Another point that makes this idea interesting, which we research in this article, is that this hypothesis we put forward to examine is completely against the common sense of society. People tend to buy real estate when they realize that their wealth is melting when an inflationary environment arises. Making calculations in local currency confuses people. Looking at the figures, it will be seen that the lowest point in dollar terms house prices is the point where hyperinflation peaks. Another confusing issue is that many societies have experienced an inflationary environment but not a hyperinflationary environment. 30% inflation, which is considered to be high on a world scale, may not hit the real estate sector, and may even increase the prices in the market on a foreign currency basis, but what if the inflation is 300% and the rental fees paid before half of the annual contracts are filled become meaningless due to inflation? What if home ownership has become a harmful investment instrument because of government price controls? What if banks start giving loans for a maximum of 6 months due to hyperinflation? What could happen in such an environment? Hyperinflation is the more severe form of inflation. If we use simple logic, if the prices of real estate in dollar terms increase in an inflation environment, it is expected that the price of real estate will increase more in hyperinflation where there is more inflation. However, the reality may not be like that. If the Inflation — Property Price (in Dollars) graph charts a linear upward trajectory up to a point in inflation, it may be out of linearity after a certain point.
In summary, is it possible that the society thinks that hyperinflation, which it has never experienced, is only a more severe version of high inflation, and is running towards the real estate sector, which it should never do it? This is what makes this article interesting in a way.
If you want to see the calculations in more detail on the excel table, you can download the calculation sheet here.
STORY OF THE CRISIS
The gold anchor application of Bulgarian Lev, which was anchored in gold until 1989, was abandoned in 1989. After the disintegration of the Eastern Bloc, Bulgaria, which was a member of this bloc, started the transition to the free market. The Bulgarian government preferred a gradual transition instead of a sudden transition, thus avoiding a sudden deterioration in parameters such as unemployment rates. On the other hand, only 20% of the enterprises were privately owned and the rest was public. To sum up, banks have become risky by making large loans to companies, especially public enterprises. Both the public and the banks believed that in a possible difficult situation, the executive power of the country would prevent possible collapses with capital transfers. The centrist structure of the market also supported this belief. However, in this process, the government’s debts increased rapidly and the foreign exchange reserves in the country melted. After this situation, inflation figures started to increase as the government had to devalue the local currency in order to increase the competitiveness of the country. Food shortages began to occur in the country. One of the factors that fueled inflation was the grain shortage experienced in mid-1996. To increase export revenues, the country had exported almost all of its grain resources. The lack of credit from foreign markets due to the decreased foreign exchange reserves in the central bank deepened the crisis. With inflation reaching 123% in 1996, the current government started negotiations with the IMF. However, as these negotiations did not result in a positive outcome, the current government resigned in December 1996 and re-elections were held in April 1997, and inflation reached 1061% in 1997 until these political changes took place. In fact, inflation reached the level of 2000% in March 1997. Meanwhile, the closure of some banks caused the lev-dollar parity to deteriorate further.
END OF HYPERINFLATION PERIOD
As a result of the change of power in May 1997, the new administration changed the country’s economic policy. In April 1997, parliamentarians were given a seminar on the new central bank law. In July 1997, the new central bank law began to be implemented. On the same date, a currency board was established and the Lev was anchored to the German mark. Although there are explanations that seem very technical and complex behind the currency board, to put it simply, it is the process of transferring the power of printing money from a nation, namely the voters, to a technocratic structure. If the decision to print money is not in the hands of the voters, there will be no money printing, so there will be no inflation.
After Lev was anchored to Mark, the desired exchange rate was not immediately reached. For a while, 1 Mark was traded at 922 Lev, as there were not enough foreign currency reserves at the central bank. However, as the central bank increased its foreign exchange reserves and stopped printing money in a short time, the desired targets were achieved in terms of exchange rates and 1 Mark was equal to 1000 Lev. In 1999, zero was removed from Lev and this new currency was accepted as the official currency of the country.
In the next section, we will examine whether a real estate investment made during the hyperinflation period is a sensible investment in the Bulgarian case by interpreting the available data.
ANALYSIS ON DATA
Let’s first examine the inflation figures for Bulgaria by year:
Looking at the table above, the 123% rate in 1996 and the 1061% rate that followed are quite extreme values. Now let’s make a calculation about the house prices in 1997 when hyperinflation was seen.
First, let’s add the house prices data we got from the Bulgarian Statistical Institute:
If you want to examine the methodology used by the institute for data collection, you can check it here.
This table reflects the average m2 prices of houses in Sofia province in Lev in the first quarter of the year. In order to simplify our narrative, let’s consider the m2 price as the “house price” here. Let’s examine three different scenarios in this regard.
Scenario 1 — The result of buying a house at the end of hyperinflation
Scenario 2 — The result of buying a house at the beginning of hyperinflation
Scenario 3 — The result of buying a house a few years before hyperinflation
SCENARIO 1: Buying a House After Hyperinflation (Early 1998)
Let’s say the country signs an agreement with the IMF. Every agreement with the IMF does not mean that the economy will improve, but in this scenario, we presume that an agreement with the IMF will end hyperinflation. Or the government announced its decision to tie its currency to a limited commodity. Or let’s just say we got lucky and bought a house at the end of a period of hyperinflation. What would be the result of the investment made 10 years later?
Let’s say we have 489 Lev as capital at the beginning of 1998, after 1997, when inflation reached 1060%. At the beginning of 1998, we bought a house with this capital. The inflation-adjusted equivalent of this currency was equivalent to 981 Lev at the beginning of 2008. The invested house is 2163 Lev. In other words, if we had bought a house at this time, our capital would be;
2163 Lev / 981 Lev = 2.2
So it would have been 220%. In this case, our profit is:
It would have been 220% — 100% = 120%.
The return on this investment, made in 10 years, would be 120% in Lev.
Lev's return on an annual basis would have been 120%/10 Years = 12%.
Making the Same Account in Dollars:
At the beginning of 1998, there was parity in the form of 1 Dollar = 1.82 Lev.
489 Lev was 489/1.82 = $269.
At the beginning of 2008, there was parity in the form of 1 Dollar = 1.31 Lev.
2163 Leva was 2163/1.31 = 1651 Dollars.
$1651 / $269 = 6.13
that is, it would have been 613%. In this case, our profit is:
It would have been 613% — 100% = 513%.
The return on this investment made in 10 years would be 513% in dollars.
The annual dollar return would have been 513/10 Years = 51%.
SCENARIO 2: Buying a House at the Beginning of Hyperinflation (Early 1997)
Let’s say after a year of 123% inflation, we decided to invest in a house to protect the value of our capital. We bought a house at the beginning of 1997 with 563 Lev. The inflation-adjusted equivalent of this currency was equivalent to 13117 Lev at the beginning of 2008. The invested house is 2163 Lev. In other words, if we had bought a house at this time, our capital would be;
2163 Lev / 13117 Lev = 0.165
That is, our capital would have been 16.5% of its former state.
The loss of this investment, which was made in 11 years, would be 83.5% in Lev.
Lev based loss on an annual basis would have been 83.5/11% Year = -7.6%.
Making the Same Account in Dollars:
At the beginning of 1997, there was parity in the form of 1 Dollar = 1.8 Leva.
563 Leva, 563 Lev / 1.8 Lev = 312 Dollars.
At the beginning of 2008, there was parity in the form of 1 Dollar = 1.31 Lev.
2163 Leva was 2163/1.31 = 1651 Dollars.
$1651 / $312 = 5.29
That is, it would have been 529%. In this case, our profit is:
It would have been 529% — 100% = 429%.
The return on this investment, which was made in 11 years, would be 429% in dollars.
The annual dollar return would have been 429/11% Year= 39%.
SCENARIO 3: Hyperinflation Buying a House a Few Years Ago (Early 1995)
Let’s say we decided to invest in a house with 30 Lev at the beginning of 1995, unaware of what was going to happen. The inflation-adjusted equivalent of this currency is equivalent to 2542 Lev at the beginning of 2008. The invested house is 2163 Lev. In other words, if we had bought a house at this time, our capital would be;
2163 Lev / 2542 Lev = 0.85
That is, our capital would have been 85% of its former state.
The loss of this investment made in 13 years would be 15%.
Lev loss on an annual basis would have been 15/13% Year = -1.15%.
Making the Same Account in Dollars:
At the beginning of 1995, there was parity in the form of 1 Dollar = 0.065 Lev.
30 Lev, 30 Lev / 0.065 Lev = 461 Dollars.
At the beginning of 2008, there was parity in the form of 1 Dollar = 1.31 Lev.
2163 Lev was 2163/1.31 = 1651 Dollars.
$1651 / $461 = 3.58
That is, it would have been 358%. In this case, our profit is:
It would have been 358% — 100% = 258%.
The return on this investment, which was made in 13 years, would be 258% in dollars.
The annual dollar return would have been 258%/13 Year= 20%.
CONCLUSION
In this article, we examined 3 different scenarios. At the beginning of the article, while we set out with the question, “how do we make a profit?”, we saw that we should have information about the events that are the subject of this article, not only to make a profit but also to avoid big losses. Since the results are somewhat marginal, we approached our calculation with caution. You can find the excel file with the calculations here. We checked our calculation method a few times, wondering if there might be a point we missed in calculations. However, the results seem correct. However, a critique for a possible overlooked error would be very useful for this research.
The only difference between these 3 scenarios we are working on is the timing of the real estate investment point relative to the hyperinflation period. We considered a point as the investment point, which is at the end of the hyperinflation period in the first scenario, at the beginning of the hyperinflation period in the second scenario, and a few years before the hyperinflation period in the third scenario. The return rates of these scenarios are in the chart above.
Long story short, if we want to invest in the real estate sector in a period when hyperinflation is on the agenda, it will be very beneficial to take such an action when the country’s currency is anchored to another stable value. Investing during hyperinflation will be much less profitable than investing just after the hyperinflation.
The numbers are really interesting and give important clues about when to invest in real estate at a point of hyperinflation. However, in this article, we only analyzed the data on the Bulgarian case. Would the same scenarios take place in another country with similar inflation figures? More examples need to be examined to make a definitive judgment on this issue.
ADDITIONAL
After we carried out this study, Economist Atilla Yeşilada expressed similar views by publishing a video. A situation that we are not particularly aware of, “even though the real interest rates on loans are very favorable today, won’t the interest rates of the loans taken in the past remain very high in an environment where inflation will decrease rapidly after a new monetary policy?” The question itself is an issue that needs attention. You can watch the related video here. The video is in Turkish.
RESOURCES:
1: https://www.statista.com/statistics/375187/inflation-rate-in-bulgaria/
2: https://infostat.nsi.bg/infostat/pages/module.jsf?x_2=276
3: https://en.wikipedia.org/wiki/Bulgarian_lev
4: https://www.nsi.bg/en/content/3149/market-prices-dwellings
5: https://www.imf.org/external/pubs/ft/fandd/1999/09/gulde.htm
6: https://euobserver.com/economic/114421
7: https://en.wikipedia.org/wiki/Zhan_Videnov
8: https://www.rferl.org/a/1084339.html
9: Berlemann, Michael; Nenovsky, Nikolay (2003) : Lending of first versus lending of last resort: The Bulgarian financial crisis of 1996/1997, Dresden Discussion Paper Series in Economics, №11/03, Technische Universität Dresden, Fakultät Wirtschaftswissenschaften, Dresden
link: https://www.econstor.eu/bitstream/10419/48137/1/362951284.pdf
10: https://en.wikipedia.org/wiki/List_of_heads_of_government_of_Bulgaria
13: https://tr.coinmill.com/BGL_BGN.html
