Estonia: analysis of a housing boom
Economic and Financial Affairs, European Commission
Download Document| Date Published | 2007 |
| Version | |
| Primary Author | Baudouin Lamine |
| Other Authors | |
| Theme | |
| Country | Estonia |
Abstract
Financial market liberalisation and financial convergence after EU accession, extremely low real interest rates as well as fast rising disposable income and wage expectations contributed to rapid lending growth in Estonia from 2000 to 2007. Favourable fiscal provisions further contributed to the phenomenon. The inadequacy of and progressive dissatisfaction with the housing stock inherited from the Soviet period also resulted in greater demand for new housing units. On the supply side, labour migration to neighbouring Finland exacerbated structural weaknesses, such as the initial relative scarcity of private construction companies. This resulted in houses reaching record prices in 2007, up by 400% since 2000. Such prices proved unsustainable. A downward adjustment of house prices has now taken place, reflecting e.g. higher interest rates, tightened lending conditions, as well as the severe economic downturn. Despite a general feeling that the real estate market seems to be nearing the bottom, it can not be expected to regain strength before the whole economy starts recovering. In a longer term perspective, phasing out fiscal incentives and exemptions, as well as strengthening real estate taxation, might become advisable.