During the year to end-November 2013, the average price of apartments in Tallinn, Estonia’s capital, soared by 13.75% (12.12% inflation-adjusted) to €1,307 per square meter (sq. m), according to Ober Haus Real Estate Advisors. During the latest quarter, apartment prices in Tallinn rose by 4.31% (5.43% inflation-adjusted).
This is in line with figures released by Statistics Estonia, which shows that the average purchase price of dwellings in the whole country rose by 8.43% (5.54% inflation-adjusted) in the third quarter of 2013 from a year earlier, to €835 per sq. m.
The country’s major cities saw the biggest price-rises during the year to end-Q3 2013:
- In Tallinn, the average price of dwellings purchased skyrocketed by 15.5% to €1,272.4 per sq. m. in 2013.
- In Tartu City, the second largest city and the intellectual capital of Estonia, the average price of dwellings purchased soared by 12.1% to €1,073.9 per sq. m.
- In Parnu City, the country’s summer capital, located in the southwestern, the average price of dwellings purchased rose by just 1.9% to €806.5 per sq. m.
- In Estonia excluding Tallinn, the average purchase price of dwellings rose by 3.8% to €527.1 per sq. m.
After Estonia's amazing 36% annual house price rises from 2004 to 2006, prices of dwellings started to fall in 2007, partly due to the global financial meltdown.
- In 2007, the average price of dwellings dropped by 1.5% (-9.7% inflation-adjusted)
- In 2008, the average price of dwellings plunged by 18.3% (-24.5% inflation-adjusted)
- In 2009, house prices plummeted by 30.5% (-29.1% inflation-adjusted)
After these 3 horrendous years, a house price recovery began in the second half of 2010, with the average price of dwellings rising modestly by 4.1% (-1% inflation-adjusted). In 2011, nationwide house prices soared by 12.3% (7.9% inflation-adjusted). In 2012, house prices also increased by 5.4% (1.6% inflation-adjusted).
Property demand continues to increase. During the third quarter of 2013, the total number of purchase-sale contracts of real estate in Estonia rose by 15.6% y-o-y to 11,037, according to Statistics Estonia. Likewise, the total value of real estate contracts also increased 22.8% to €555.2 million in Q3 2013 from the same period last year.
Residential construction activity continues to rise. Dwelling permits soared by 30.2% to 784 in Q3 2013 from the same period last year, according to Statistics Estonia. Dwellings completed also increased by 13.2% y-o-y to 436 units in Q3 2013.
The average housing loan interest rate stayed steady at 2.5% in October 2013, based on figures from the Bank of Estonia, the country’s central bank. Over the same period more than 2,000 new housing loan contracts were signed, the highest since 2008. The total value of housing loans taken out in October 2013 increased by 28% y-o-y to €71 million.
Estonia’s housing market is expected to grow even stronger in 2014, as the country’s economic growth accelerates next year. House prices are expected to continue rising next year, according to local property experts.
Estonia's economy is expected to grow by just 1% this year, before growing by 3.1% in 2014 and 3.8% in 2015, according to Nordea Bank.
Analysis of Estonia Residential Property Market »
A 45 sq.m. apartment costs around EUR 1,900 per sq. m. (EUR 176 per sq. ft.) while a 120 sq. m. apartment costs around EUR 2,400 per sq. m. (EUR 223 per sq. ft.).
Renting costs, on average, EUR 438 for a 45 sq. m. apartment (484 sq. ft.) per month, whereas for a 120 sq. m. apartment (1,291 sq. ft.), monthly rents are around EUR 1,000. Average rents per sq. m. are around EUR 8.5 per month.
Gross rental yields from apartments in Tallinn are poor to moderate, ranging from 4.28% to 6.05%. Smaller apartments tend to earn higher rental returns. A 45 sq. m. apartment has moderate to good rental yields at 6.05%, whereas a 120 sq. m. apartment earns poorer rental yields at 4.28%.
Round-trip transaction costs on residential property in Tallinn are low.
Capital Gains: Capital gains from the sale of immovable property are aggregated with other income and taxed also at 21%.
Inheritance: There are no inheritance taxes in Estonia.
Residents: Residents are taxed on their worldwide income at a flat rate of 21%.
The previously announced income tax rate reductions have been cancelled.
Rents: ‘Luxury’ housing category is free from rent control. Other housing is subject to a prohibition on “excessive rents” (Law of Obligations S301). The landlord can ask for up to three months’ deposit.
Tenant Security: Contract periods can be freely agreed between landlord and tenant, but there are dangers – upon expiry of a specified term lease, the tenant may demand that the contract be extended for up to three years, and in fact the tenant can demand repeated extensions. In addition, unless care is taken, specified term contracts can default to ‘unspecified term contracts,’ in which tenant eviction is difficult.
From 2000 to 2006, Estonia’s economy expanded by an average of 8.4% annually, including resounding 10.1% GDP growth in 2006, and 8.9% growth in 2005. In 2007, GDP growth was 7.5%, one of the highest growth rates in the EU. Unemployment fell from 13.7% in 2000, to just 4.7% in 2007.
However, Estonia’s economy entered recession in Q3 2008, mainly due to the adverse impact of the global financial crisis. The economy contracted by 3.7% in 2008, and by a staggering 14.3% in 2009. Unemployment surged to 13.8% in 2009.
As the country fell deeper into recession, the government cut spending by about 7.8% in 2009. It kept its income tax rates low, but hiked VAT by 2% to 20% in July 2009. By 2010 Estonian unemployment had risen to 17.3%.
The economy recovered in 2010 with GDP growth of 2.6% and a fiscal budget surplus. In January 2011, Estonia was the first country since the financial crisis to join the Eurozone.
Estonia had astounding growth of 9.6% in 2011, with strong exports. Unemployment fell to 12.5%. Then in 2012, the economy expanded by 3.9%, bolstered by construction and export growth.
Nordea Bank projects that Estonia’s economy will expand by about 1% this year, down from its initial forecast of 1.9%, mainly due to the high reference base of government sector investments, weakness of exports and rising inflation. However, Nordea expects the country’s economic growth to accelerate to 3.1% in 2014 and to 3.8% in 2015.
Unemployment fell to 8% in the third quarter of 2013, from 9.7% during the same period last year, according to Statistics Estonia.
In November 2013, Estonia’s inflation rate stood at 2.1%, the highest among the EU countries, according to figures released by Eurostat. Inflation is expected to reach 2.9% in 2013, 2.3% in 2014 and 3.1% in 2015, according to Nordea.
In 2012, Estonia, together with Sweden, had the EU's lowest government deficit of just 0.2% of GDP, according to Eurostat. In 2013, the country is expected to register a budget deficit of about 0.4% of GDP, according to Ernst & Young. Estonia’s budget is projected to be in balance next year.
In Q2 2013, Estonia recorded the lowest government debt to GDP ratio across the European Union of about 9.8%, according to Eurostat.