Real estate price dynamics, housing finance and related macro-prudential tools in the Baltics
Economic and financial Affairs, European Commission
Download Document| Date Published | 2012 |
| Version | |
| Primary Author | Lina Bukeviciute |
| Other Authors | Daniel Kosicki |
| Theme | |
| Country | Estonia |
Abstract
Indicators relating to demand forces and the pricing framework point towards the build-up of house price misalignments in the Baltic States in the years up to 2007, with various degrees of correction taking place since mid-2008. However, it seems that this price adjustment is now fading out. Meanwhile, although household-related debt in the Baltic States remains below the euro-area average, its growth was among the strongest in EU countries during the boom years. Deleveraging of the housing sector, which was triggered by the crisis, has recently been bottoming out in Estonia and Latvia. Lending conditions in the Baltic States remain favourable compared to the EU average. Effective real estate taxation (in particular in Estonia and Lithuania) is below the euro area average and the supervisory constraints are milder that in most of the euro area countries (seemingly with an exception for Lithuania). Currently, real interest rates on mortgages are negative in Estonia and among the lowest in the EU. If no changes were expected, this could also encourage the uptake of mortgage debt. On the back of increasing deposits, the improving liquidity situation of banks puts them in a position to re-launch loan supply. Given recent market developments and the existing incentives, the Baltic real estate market should be closely monitored, with a focus on the potential risk that unfettered demand and credit expansion could fuel another regional housing boom–bust cycle.