Latvia

The average price of apartments in Riga rose by 2.06% to LVL693 (€989) per square metre (sq. m.) during 2012, the lowest year-on-year increase since May 2010, according to Ober Haus. Adjusted for inflation property prices rose just 0.48%.  During the latest quarter, average Riga apartment prices were unchanged.

Arco Real Estate’s data supports this, showing Riga house prices up 2.06% (0.54% in real terms) during the year to November 2012. During the latest quarter, house prices were again unchanged.

After several years of double-digit property price increases, the Latvian housing market started to weaken in 2007.

• In 2007, house prices dropped by 5.01% (-16.71% in real terms) from a year earlier.
• In 2008, house prices plummeted by 30.47% (-37.11% in real terms) y-o-y
• In 2009, property prices plunged by another 42.02% (-41.34% in real terms)

Then in 2010, the housing market started to recover with house prices rising by 5.05% (2.49% in real terms), rising another 5.79% in 2011 (1.65% in real terms). But prices were still 63.3% lower than at the July 2007 peak, according to Arco Real Estate.

In 2013, economic growth is projected to be 3%.  After a deep recession lasting three years (GDP -3.3% in 2008, -17.7% in 2009, and -0.34% in 2010), the Latvian economy recovered and experienced real GDP growth of 5.5% in 2011, and 5% in 2012.

The total number of completed new dwellings dropped by 11% in the first three quarters of 2012 from the same period last year, according to the Central Statistical Bureau of Latvia (CSB).

Housing loans are falling. In December 2012, total loans for house purchase dropped by 11% to LVL3.75 billion (€5.35 billion) from the same period last year, according to the Bank of Latvia.

The average interest rate for house purchase loans denominated in lats was 3.2% in December 2012, up from 3.1% in the previous month, according to the Bank of Latvia. On the other hand, the average interest rate for house purchase loans denominated in foreign currencies was 3.4% in December 2012, up from 3.1% in the previous month.

Real estate investment in Latvia confers residency status.  A foreigner can receive permanent residency in Latvia (according to the Baltic Legal):

• if a person invests LVL50,000–LVL100,000 in real estate, depending on the size of the town (LVL 100,000 in the Riga Planning Region, Jelgava, Daugavpils, Jēkabpils, Liepāja, Rēzekne, Valmiera or Ventspils; LVL 50,000 in other areas);
• if a person invests at least LVL 200,000 in a Latvian credit institution in the form of subordinated capital (such transaction must be for not less than five years);
• if a person invests LVL 25,000 in the equity capital of a company to be registered in Latvia, following this up with a payment of at least LVL 20,000 in one year’s time.

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The Latvian crisis began with the economy expanding by an average of 8.5% from 2000 to 2007, and during this period property prices rose by almost 700%.  However, inflation rose from 2.5% between 1999 and 2003, to over 10% in 2007.

By the second half of 2007, the housing bubble had burst. Demand plunged. House prices plummeted.  Unemployment rose rapidly. Wages fell sharply.

By early 2008, the boom was over. The country’s fiscal deficit shot up. Capital was leaving the country. Exports were falling. Domestic demand was collapsing. By 2009, Latvia was close to economic collapse. Latvia’s currency peg meant the Bank of Latvia could not raise interest rates to tame inflation. Instead, when the crisis hit, the authorities resorted to a scorched-earth internal devaluation: access to credit was limited, taxes raised, wages were reduced and government spending cut.

In 2008, Latvia was able to secure a €7.5 billion standby loan from a group lead by the EU and the International Monetary Fund (IMF), coupled with rigid austerity measures. The bailout prevented total economic collapse. More than €3.3 billion of the funds were used to pay public sector wages and maintain essential services.

The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.2% in 2007 to 18.7% in 2010.

Latvia bounced back strongly in 2011, with real GDP growth of 5.5%. Latvia’s recovery was mainly driven by exports and an improving business and investment climate. Exports grew by 33% in 2011. The IMF has hailed Latvia’s cost-cutting efforts as a model for indebted eurozone countries as a way of averting economic meltdown.

The economy was estimated to have expanded by 5% in 2012, one of the highest in the European Union (EU), according to the European Commission. In 2013, the economy is expected to expand by 3%, according to the Bank of Latvia.

In December 2012, the registered unemployment rate in Latvia fell to 10.5%, according to the State Employment Service. Riga Region has the lowest unemployment rate of 6.8% while Latgale has the highest, at 21.1%.

The Bank of Latvia (Latvijas Banka), the country’s central bank, kept the benchmark refinancing rate at 2.5%, as inflationary pressures eased.

The country’s overall inflation rate was 1.6% in December 2012, the lowest level since November 2010, according to the Central Statistical Bureau of Latvia (CSB).

Latvia (pop. 2 million; GDP/cap. US$13,316), together with Estonia and Lithuania, became independent from Soviet Union in 1991. Latvia was welcomed as a EU member in May 2004, just weeks after it joined NATO. It plans to adopt the euro in January 1, 2014, hoping that it will help to facilitate economic stability.