Property prices in the country’s major cities continue to rise during the year to end-Q3 2012, according to Statistics Estonia:
- In Estonia excluding Tallinn, the average purchase price of dwellings rose by 10.25% to €507.9 per sq. m.
- In Tallinn, the average price of dwellings purchased increased by 2.8% to €1,101.3 per sq. m.
- In Tartu City, the second largest city and the intellectual capital of Estonia, the average price of dwellings purchased soared by 14.6% to €958.2 per sq. m.
- In Parnu City, the country’s summer capital, located in the southwestern, the average price of dwellings purchased rose by 3.8% to €791.8 per sq. m.
- In Estonia, the average purchase price of dwellings rose by 6.4% to €770.5 per sq. m.
After 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 2.4% (-10.9% inflation-adjusted)
- In 2008, house prices fell 21.8% (-26.9% inflation-adjusted)
- In 2009, house prices dropped 30.2% (-29% inflation-adjusted)
After these 3 horrendous years, a house price recovery began in the second half of 2010, and during 2010 the average price of dwellings was up 8.3% (2.4% inflation-adjusted). In 2011, house prices soared by 15.8% (11.6%).
The total number of dwelling permits rose by 7.2% to 3,035 units in 2012, according to the Register of Construction Works. The total number of dwellings completed increased by about 3.8% to 1,190 units. By end-2012, the total housing stock in Estonia was 657,800 dwellings.
The average interest rate of housing loans fell to 2.57% in December 2012 from 3.42% in January 2012, based on figures from the central bank. Despite these low interest rates, the total housing loans in Estonia fell slightly by 0.1% to €5.85 billion by end-Q4 2012 from the previous quarter, according to Bank of Estonia.
Estonia’s housing market is expected to remain stable in 2013, with property prices rising modestly, amidst modest economic growth, according to local property experts. In 2013, the economy is expected to grow by 3%, after GDP growth of 2.4% in 2012 and 7.6% in 2011.
Analysis of Estonia Residential Property Market »
A 45 sq.m. apartment costs around EUR 1,900 per sq. m. while a 120 sq. m. apartment costs around EUR 2,100 per sq. m. It costs, on average, EUR 400 to rent a 45 sq. m. apartment per month, whereas for a 120 sq. m. apartment, monthly rents are around EUR 1,000. Average rents per sq. m. are around EUR 8 per month.
Gross rental yields from apartments in Tallinn are poor to moderate, ranging from 4.77% to 5.72%. Smaller apartments tend to earn higher rental returns. A 45 sq. m. apartment has moderate rental yields at 5.72%, whereas a 120 sq. m. apartment earns poor rental yields at 4.96%.
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.
The economy entered recession in Q3 2008, contracting by 3.7% in 2008, and by 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 2.3% 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 7.6% in 2011, with strong exports. Unemployment fell to 12.5%.
In the third quarter of 2012, real GDP growth was 3.5% from a year earlier, bolstered by construction and export growth.
The unemployment rate dropped to 9.7% in the third quarter of 2012. Average monthly gross wages and salaries rose by 5.7% to €855 from the same period last year, after an annual increase of 5.9% in 2011, according to Statistics Estonia.
In December 2012, consumer prices rose by just 3.5% y-o-y, the weakest pace in 28 months, according to Statistics Estonia.
The Bank of Estonia, the country’s central bank, cut its GDP growth forecast for 2013 from 3.6% to 3%, mainly due to the eurozone debt crisis. Likewise, Swedbank also slashed its growth projections for Estonia in 2013 from 3.7% to 3.1%.
"Due to fragile external demand conditions in Nordic countries, export performance will remain weak over the first half of 2013. In addition, state-financed investments are expected to be somewhat smaller than in 2012," Swedbank said.
Estonia’s government debt to GDP ratio stood at 9.6% in the third quarter of 2012, the lowest government debt to GDP ratio in the EU, according to the Eurostat. The government aims to cut the budget deficit to 0.7% of GDP in 2013.