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Jan 20, 2017    Lalaine C. Delmendo

Latvia rising! Riga's housing market up 9.75%

Latvia house pricesIn the highest annual rise for more than nine years, average apartment prices in Riga rose by 9.75% y-o-y in November 2016 to €1,159 (US$1,235) per square metre (sq. m.),after growth of just 0.28% a year earlier, according to real estate agent OberHaus. When adjusted for inflation, apartment prices rose by 8.44%.

Although their figures are based on different transactions, Arco Real Estate’s figures show a similar trend, with apartment prices in Riga rising by 7.66% (6.37% in real terms) to €703 (US$749) per sq. m. during the year to November 2016 - in this case, the 13th consecutive month of annual house price rises above 2%.

OberHaus tends to deal in high-end city-centre housing, while Arco deals in the estates.

In Riga’s city centre, new apartments are priced from €1,450 (US$1,545) to €3,800 (US$4,048) per sq. m. in 2016 while in the suburbs of Riga, prices ranged from €1,000 (US$1,065) to €1,750 (US$1,864) per sq. m., according to real estate firm BALSTSAigarsZarins.

Outside Riga, apartment prices are also rising rapidly.

  • In Ogre,one of Latvia’s greenest towns due to its amazing parks and forests, the average apartment price increased 7.5% during 2016 to €477 (US$ 508) per sq. m.
  • In Kauguri,a popular residential area in the western part of Jurmala, the average apartment price rose by 12.4% during 2016, to €470 (US$ 501) per sq. m.
  • In Salaspils, mostly known for its military history, the average apartment price rose by 12.4% during 2016, to €530 (US$ 565) per sq. m.
  •  In Jelgava, a hospitable city located on the banks of the River Lielupe, the average apartment price rose by 9.6% during 2016 to €400 (US$ 426) per sq. m.

Demand remains strong. During 2016, the number of real estate transactions increased 10.5% from the previous year, according to BALSTS.

Optimism remains high. “All indicators show that the real estate market development, which has begun during the last two years should continue in 2017,” commented the CEO of BALSTS. “We expect that in 2017 the average price growth will continue to increase.”

However in the third quarter of 2016, the economy grew by just 0.8% from the same period last year, a sharp deceleration from a 3.3% y-o-y expansion in Q3 2015 and the slowest pace of growth since Q4 2010, according to the Central Statistical Bureau of Latvia (CSB).Latvia’s economy was estimated to have grown by about 1.4% in 2016, the weakest growth since 2010, according to the Bank of Latvia. Though, the economy is projected to pick up this year, with a 3% annual growth.

Why the strong demand?  Partly because foreigners get a five-year residence permit in Latvia if they buy residential real estate, under Immigration Law amendments implemented on July 1, 2010. The conditions were then (according to Baltic Legal):

  • The transaction should exceed €142,000 (US$ 151,266) in Riga or Jurmala, or €71,000 (US$ 75,633) in other regions;
  • Only non-cash funds may be used to buy real estate;
  • The buyer must not have any real estate tax arrears in Latvia (and must never have had such arrears);
  • Transaction concluded after July 1 2010.

Since the foreign real property buyer visa scheme was launched in July 2010, most foreign buyers have been Russians, looking for properties in Riga and Jurmala. With Latvia considered to have one of the lowest house prices in Europe, foreigners now account for 70% of all property transactions. In recent years, most of the in-demand properties were located in Jurmala, according to the Office of Citizenship and Migration Affairs. Russians have made the most purchases, followed by Ukrainians, Chinese, Kazakhs, and Uzbeks, according to Arco Real Estate’s chairman of the board of directors, Aigars Smits.

In September 2014, Immigration Law amendments increased the threshold for obtaining a residence permit and introduced other conditions and costs, if a foreigner’s real estate was registered in the Land Register after September 1, 2014:

  • Minimum transaction value of real estate located anywhere in Latvia must be €250,000 (US$266,313).
  • The total cadastral value of the property at the time of acquisition should be at least €80,000 (US$85,220).
  • Payment of a state budget contribution worth 5% of the real estate’s transaction value.

Latvia’s housing boom and bust

Latvia house price indices

Latvia had one of the biggest housing collapses in the world after 2007.   The crisis began when Latvia’s economy expanded by an average of 8.5% from 2000 to 2007, during which period property prices rose by almost 700%. 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. House prices plummeted.

In 2008, Latvia was able to secure a €7.5 billion (US$ 8 billion) standby loan from a group lead by the European Union (EU) and the International Monetary Fund (IMF), coupled with rigid austerity measures. The bailout prevented total economic collapse. More than €3.3 billion (US$ 3.52 billion) of the funds were used to pay public sector wages and maintain essential services, but nevertheless, austerity was a condition of the bailout.

Nevertheless 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 6.1% in 2007 to 19.5% in 2010. The country’s fiscal deficit shot up, capital left the country, exports fell, and domestic demand collapsed.

  • In 2007, apartment prices dropped by 5.01% (-16.71% in real terms) from a year earlier.
  • In 2008, apartment 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), and then rising another 5.79% in 2011 (1.65% in real terms). In 2011 Latvia achieved GDP growth of 5.5%, and growth of 5.6% in 2012. 

In 2012 house prices increased by only 2.06% (0.48% in real terms), partly due to tighter credit policies. In 2013, house prices rose by 4.15% (4.57% in real terms).

In 2014 house price rises slowed to 2.23% (2.03% in real terms), followed by meagre growth of 0.38% (0.04% in real terms) in 2015. The slowdown in prices was due to the amendments in the residence permit program, implemented in September 2014, which mainly affected new apartments built for foreigner buyers. According to Ober Haus, the law changes caused an almost 21% drop in the average price of these apartments in 2015.

Housing supply improving

Dwelling completions are still weak. During the first three quarters of 2016, dwelling completions increased 2.3% to 1,635 units from the same period last year, according to the CSB – an improvement from the 15% annual decline seen in 2015.

Before independence, more than 10,000 apartments were completed annually. After independence the number of dwelling completions dropped to less than 1,000 units annually between 2000 and 2003.

Latvia dwellings completed

It was only in 2004 that housing construction began to pick up and completions peaked at 9,319 units in 2007. Owner-occupancy rose dramatically, from 21% in 1990 to 87% in 2006.

However the sudden increase in supply flooded the market, pushing prices down. Units started in 2006 and 2007 are still being completed. According to the Central Statistical Bureau of Latvia (CSB)’s figures, 2,201 units dwellings were completed in 2013 up by 5.5% on the previous year, but a reassuring 76.4% down on the 2006 peak. In 2014, dwelling completions increased by almost 20% to 2,631 units.  But completions still remain far below the peak.  

Low interest rates

Latvia interest rates

The ECB key rate is currently at its all-time low of zero, due to a surprise 5-basis-points rate cut in March 2016, in an effort to fend off deflation.

Housing mortgage costs in November 2016, for new loans:

  • Floating rate and up to 1 year IRF: 2.49%, down from 2.81% a year earlier
  • 1-5 years IRF: 5.25%, down from 9.2% a year earlier
  • 5-10 years IRF: 11.92%, down from 13.76% a year earlier
  • Over 10 years IRF: 4.94%, slightly down from 4.97% a year earlier

For outstanding loans, in November 2016:

  • Housing loans with maturity of up to 1 year: 3.84%, down from 4.09% a year earlier
  • Housing loans with maturity over 1 year and up to 5 years: 5.65%, up from 4.6% a year earlier
  • Housing loans with maturity over 5 years: 2.21%, down from 2.33% a year ago

Mortgage market continues to shrink, despite an introduction of a state support programme

During the house price boom, the pace of mortgage growth was amazing - housing loans outstanding expanded by almost 90% annually from 2004 to 2006. Total mortgage debt rose from 2.1% of GDP in 2000, to 29.7% of GDP in 2007.

It was not until 2008 that mortgage market growth ground to a halt; since then, the country’s share of total mortgage debt to GDP has shrunk from 36.6% in 2010 to 17.7% of GDP in 2016.

Latvia housing loans

Even today, the value of outstanding housing loans continues to decline as most foreign homebuyers typically prefer to pay in cash, despite the introduction of the state-guaranteed Mortgage Loan Programme in 2015, under which the Latvian Development Finance Institution (ALTUM) provides guarantees for mortgage loans granted by commercial banks to families with children.  Since the program’s inception in January 2015, state guarantees already totaled €22.3 million (US$ 23.8 million), benefitting about 3,460 families.   

Housing loans with a maturity of over 5 years account for 96.3% of all loans. Loans with maturity of up to 1 year and those with maturity of 1-5 years represented 1.8% and 1.9%, respectively. 

Rental yields are moderate

Recent research conducted by the Global Property Guide showed that apartments located in Riga city can earn yields ranging from 4.26% to 5.23%. Bigger apartments of around 120 sq. m. have lower yields at around 4.26%. Smaller units such as 45 sq. m. and 75 sq. m. unit flats earn higher yields at around 5.23% and 4.39%, respectively.

Apartments in Riga’s suburbs earn higher rental yields. A 50 sq. m. apartment might typically yield 5.23%, while a larger apartment of 120 sq. m. could yield 5.33%.

In 2009 the number of potential tenants contracted due to the economic recession, causing rents to plunge by 40%.

The rental market bounced back in 2010 with average rents growing by 20%, due to growing demand brought by Latvia’s improving economy. In 2011 there was a 15% average rent increase, and in 2012 a 10% to 15% increase. In 2013, average rents were up by 10% to 15%, followed by a 5% to 10% rise of average rents in 2014. In 2015, average rents went up by around 5%, according to Ober Haus.

Surprisingly in 2016, rents for upper-class apartments in downtown Riga dropped 15% to 20%, due to declining demand for rental apartments, according to real estate firm Latio.

During 2016:

  • The average monthly rent for new apartments and renovated buildings in Riga’s city centre dropped to €8.5 (US$ 9) per sq. m. from €11 (US$ 12) per sq. m. a year earlier
  • The average monthly apartment rent in partly renovated pre-war buildings dropped to €6 (US$ 6.4) per sq. m. from €7.5 (US$ 8) per sq. m. the previous year

The highest apartment rents can be found in the Old Town. Rents for two-room apartments range from €600 (US$ 639) to €1,000 (US$ 1,065) per month, while three-room apartments can be rented from €1,000 (US$ 1,065) to €2,500 (US$ 2,663) per month.

In the suburbs, monthly rents for one-room apartments range from €250 (US$ 266) to €300 (US$ 320). Two-room apartments have monthly rents ranging from €300 (US$ 320) to €600 (US$ 639).

Economy slowing sharply

Latvia gdp inflation

On January 1, 2014, Latvia adopted the euro. Its adoption is a recognition of economic success, especially in taming inflation and limiting the budget deficit, estimated at 0.8% in 2016, slightly down from a deficit of 1.3% of GDP in 2015, according to the European Commission. The deficit is expected at around 1.1% this year and at 1.2% in 2018.

In the third quarter of 2016, the economy grew by just 0.8%y-o-y,the slowest pace of growth since Q4 2010, according to the Central Statistical Bureau of Latvia (CSB). The construction sector plunged by a massive 24% y-o-y in Q3 2016, which weighed heavily on the country’s overall economic activity.

The economy is projected to pick up this year, with 3% annual growth.

Latvia’s public debt was projected at 37.2% of GDP in 2017, down from 40% in 2016, according to the European Commission.

In November 2016, unemployment stood at 8%, down from 17.1% from 2009 to 2012.

Consumer prices increased 1.3% y-o-y in November 2016, from zero inflation in the same period last year, according to the CSB. In 2015, overall inflation stood at 0.2%, from 0.7% in 2014, 0.01% in 2013, 2.3% in 2012, and 4.2% in 2011, according to the International Monetary Fund (IMF).

Latvia is now part of the “rich nations club” OECD

Latvia unemployment

Latvia has officially become the 35th member of the prestigious OECD in July 2016. “To a certain extent, it (Latvia’s accession to the OECD) is a matter of prestige. Some of the key questions asked by investors are about whether it is geopolitically safe here, whether we have reduced corruption, and the OECD membership would partly be an answer to the investors that we are a trustworthy country, not some kind of a banana republic,” said Finance Minister Dana Reizniece-Ozola.

Latvia has had a new prime minister, Māris Kučinskis from February 2016. PM Kučinskis took office after former PM Laimdota Straujuma resigned in December 2015, due to the infighting within the ruling coalition. PM Kučinskis is a member of the Union of Greens and Farmers, and Latvia’s first prime minister not to be a member of the Unity Party since 2009.

Aside from PM Kučinskis, Latvia also elected Raimonds Vējonis as state president in June 2015. State President Vējonis is a member of the Green Party, which is a part of the Union of Greens and Farmers.

Relations with Russia a big concern

One of the new government´s biggest challenges is geopolitical tensions due to Russia’s aggressive action in seizing the Crimea in 2014. Russia’s aggression prompted Estonia, Lithuania, and Latvia to seek NATO troop deploymentsin their nations.

“An Allied presence is an essential prerequisite for Latvia’s security in a situation where Russia does not change its policies regarding the Ukraine conflict and, at the same time, strongly demonstrates its military presence and potential in the Baltic Sea region,” said Latvia’s Ministry of Defense.

Article 5 of NATO’s charter states that a military attack on one member state is an attack on all of them.  So in theory Latvia should be safe. 

But NATO’s former secretary-general Anders Fogh Rasmussen, warned the Baltic states in early 2015 that Putin may attack all the same.

“There is a high probability that he will intervene in the Baltics to test Nato’s Article 5... Putin knows that if he crosses the red line and attacks a Nato ally, he will be defeated. Let us be quite clear about that. But he is a specialist in hybrid warfare,” according to Rasmussen.

Anxiety about Russia´s intentions remains high, especially with an untested new leader in the White House, who appears to be committed to improving Russia-US relations, and who has been highly critical of NATO.


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