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Jul 16, 2015

Lithuania's housing market rising - very slowly

by Lalaine C. Delmendo

Lithuania house pricesDemand for houses remains depressed in Lithuania, despite good economic growth.  Lithuania’s five major cities´ apartment price index (covering Vilnius, Kaunas, Klaipėda, Šiauliai and Panevėžys) rose by 0.6% (0.8% inflation-adjusted) during the year to end-Q2 2015, according to Ober Haus Real Estate Advisors. This was the seventh quarter of annual house price increases. 

Apartment prices in the capital, Vilnius, have risen by 12.5% since the post-crisis low of May 2010, a slow and steady rise.

During the year to June 2015:

  • In Vilnius average apartment prices rose 1.2%, to €1,298 per square metre (sq. m.).
  • In Kaunas, apartment prices rose by 0.4%, to €940 per sq. m.
  • In Klaipėda, apartment prices fell 0.4%, to an average of €975 per sq. m
  • In Šiauliai, apartment prices dropped 0.5%, to an average of €559 per sq. m.
  • In Panevėžys, existing flats rose by 0.1%, to an average of €530 per sq. m.

Residential property prices in the capital started to decline in 2008, after the global credit crunch. The housing market has not yet fully recovered since then.

  • In 2008, house prices fell by 15.23% (-21.85% inflation-adjusted)
  • In 2009, house prices fell by 26.84% (-27.77% inflation-adjusted)
  • In 2010, house prices fell by 2.98% (-6.55% inflation-adjusted)
  • In 2011, house prices dropped by 0.64% (-3.91% inflation-adjusted)
  • In 2012, house prices dropped by 1.65% (-4.36% inflation-adjusted)
  • In 2013, house prices rose by 1.12 (0.76% inflation-adjusted)
  • In 2014, house prices rose by  3.34% (3.61% inflation-adjusted)

Demand remains very weak. Transactions of detached houses fell 21% in the first quarter of 2015 from a year earlier, to an average of 535 units per month, according to the State Enterprise Centre of Registers. Apartment transactions also fell by 31% y-o-y in Q1 2015, to an average of 1,900 units per month.

In Vilnius, the number of new apartments sold fell by 29% in Q1 2015 from the same period last year, to 656 units, according to Ober Haus.

Private ownership accounted for more than 98% of the total area of dwelling stock in 2014.

In 2014, Lithuania’s economy grew by a modest 2.9%, after expanding by 3.3% in 2013, 3.8% in 2012, 6.1% in 2011, and 1.6% in 2010, according the International Monetary Fund (IMF). The economy is expected to expand by 2.8% this year and by another 3.2% in 2016. Lithuania finally joined the eurozone in January 1, 2015.

That crazy house price boom

Lithuania outstanding housing loans

Before the global crisis, Lithuania saw enormous house price increases. The average price of old apartments in Central Vilnius rose 275% between 2002 and 2006:

  • 2003: prices increased 28%
  • 2004: prices increased 29%
  • 2005: prices increased 45%
  • 2006: prices increased 56%

The average price of newly constructed one-bedroom apartments in central Vilnius rose 162% from 2002 to 2006.

Construction activity improving

During the 1980s, when the country was still socialist, more than 20,000 dwelling units were built annually.

Lithuania dwellings construction

Completions dropped to less than 5,000 annually between 1998 and 2003, leaving a huge, pent-up demand.

As the economy gathered steam, housing construction accelerated:

  • In 2004-2006 dwellings completions rose to an average of 6,700 yearly
  • In 2007, there were 9,286 completed dwellings
  • In 2008 dwelling completions rose to 11,286, the highest since 1992

From 2005 to 2008, almost 16,000 dwellings were authorized annually - around three times the number of completions.

Then suddenly things stalled.  In 2009, dwelling completions dropped to 9,400 units. Dwellings authorized fell from 19,229 units in 2007, to 7,553 in 2009. Completions averaged just 4,970 units annually from 2010 to 2013, and dwellings authorized also dropped to an annual average of just 9,400 units in 2010-13.

Recently, construction activity has picked up:

  • New residential buildings completed surged by 28.7% y-o-y to 7,624 units in 2014, based on figures from Statistics Lithuania. In Q1 2015, completions rose by 15.1% from the same period last year.
  • In Q1 2015, dwellings authorized rose by 10.1% from a year earlier.

In 2014, the number of dwelling units in Lithuania rose 0.82% from a year earlier, according to Statistics Lithuania. The total area of dwelling stock last year increased by 1.2% to 87.9 million sq. m.

Mortgage market shrinking

Mortgage debt rose from a mere 0.4% of GDP in 2000, to 22.4% of GDP in 2009, with about 80% of all purchases made with the aid of mortgages, and typically 95% of property value granted in loans.

Lithuania housing loans

However, the mortgage market started to decline in 2010 and its size fell to 16.5% of GDP in 2014.  In 2015 recovery was under way.  In May 2015, total outstanding housing loans in Lithuania increased by 0.78% to €5.95 billion, according to the Bank of Lithuania. 

Interest rates falling

Lithuania interest and mortgages rates

Before the adoption of the euro as Lithuania’s official currency, the litas was pegged to the U.S. dollar at US$ 1 = LTL4 from 1994 to January 2002. From 1999 to 2001, average housing loan rates fluctuated from 8% to 14%.

In February 2002 the litas was re-pegged to the euro at €1 = LTL3.4528. Housing loan interest rates declined to less than 6% in 2002, and to less than 4% between July 2005 and May 2006. From 2005 to mid-2007, there was not much difference between interest rates on new housing loans whether denominated in litas or in euro.

The divergence widened in January 2009, and from mid-2009 interest rates on the two currencies seemed to follow different paths.

Interest rates on litas-denominated new housing loans surged to around 10% from April to October 2009, before falling to 6.2% in March 2010, while interest rates on euro-denominated housing loans simply followed the key ECB rate downward. The interest rate hikes of 2006-2009 had disastrous effects, as almost all new loans approved between 2004 and Q3 2006 had an initial rate fixation (IRF) of less than one year.

As well as causing distress to borrowers, the litas rate hikes caused the market to shift to euro. In 2006 only 44% of new loans were denominated in euro, but from 2009 to Q1 2010, the ratio of euro-denominated loans rose to around 80% to 90% of new loans.

Interest rates on housing loans continue to fall with the adoption of the euro in January 2015. In May 2015, the average interest rate for new housing loans fell to 1.81%, from 2.3% a year earlier, according to the Bank of Lithuania.

Mortgage interest rates in May 2015:

  • 1.68% on new housing loans with initial rate fixation (IRF) of up to 1 year stood, down from 2.18% a year earlier.
  • 2.97% on loans with IRF of more than 1 year, down from 3.24%.

Likewise, average interest rates for outstanding housing loans fell:

  • The average rate for outstanding loans with IRF of up to 1 year stood at 0.64% in May 2015, down from 0.8% a year earlier.
  • The average rate for outstanding loans with IRF of 1-5 years was 2.19%, down from 3.03%
  • The average rate for outstanding loans with IRF of over 5 years was 1.85%, down from 2.18%

Rental yields in Vilnius moderate to good, and climbing

Lithuania Vilnius apartment price and rent graph

In Vilnius, rental yields continue to climb. Gross rental yields on apartments in the city centre range from 5.79% to 6.01%, according to a Global Property Guide research in August 2014. In the suburbs, rental yields range from 4.64% to 6.00%. These are moderate to good yields, reflecting the fact that the economy continues to pick up.

While prices tripled in Vilnius from 2002 to 2006, rents stayed mostly flat. From 2002 to 2007, the average rent for a one bedroom apartment rose by a mere 18% while the average apartment sale price soared by 197% (from € 1,217 per sq. m. to €3,623).

Lithuania Vilnius average rent apartments graph

Rental rates are somewhat lower in the suburbs. Rents in the centre are around €9-10 per sq. m. per month in August 2014, while in the suburbs rents are around €8 per sq. m. per month.

A 120 sq. m. apartment in the centre could be rented out for around €1,200 per month while in the suburbs, a 120 sq. m. apartment fetches around €900 per month.

Modest economic growth, declining unemployment

Lithuania GDP growth graph

After average growth of 8.2% from 2001 to 2007 the economy began to slow in 2008, due to contagion from the global financial meltdown. In 2009, economy shrank by almost 15%, the worst recession in the EU, largely due to the bursting of the property bubble, higher tax rates, the end of cheap money and a huge contraction in exports.

In 2010 the economy finally emerged from recession, with GDP growth of 1.6%.

Then in 2011 the Lithuanian economy began to expand strongly, with real GDP growth of 6.1%, the second fastest pace in the EU. In 2013, Lithuania’s economy grew by a healthy 3.3%, after expanding by 3.8% in 2012, according to Statistics Lithuania. In 2014, the economy grew modestly by 2.9%, fuelled by strong domestic demand and a recovery in the real estate and construction sectors.

Lithuania´s growth over the past five years has been impressive. “Sustainable growth in the face of external challenges shows the strong basis of the Lithuanian economy and is a good sign for the future,” noted the IMF. 

The economy is expected to expand by 2.8% this year and by another 3.2% in 2016, driven by domestic demand, with rising wages, falling unemployment and subdued inflation, according to the European Commission. However, Bank of Lithuania has recently cut its growth forecast for this year to 2%, from 2.7%, due to falling exports caused by the embargo imposed by Russia.

Lithuania unemployment

Unemployment continues to fall. In May 2015, the jobless rate stood at 8.2%, down from 8.9% in April, 9% in March, 9.2% in February, and 9.4% in January 2015 - and down from 17.8% in 2010, according to Statistics Lithuania.

Inflation stood at -0.5% in June 2015, the seventh consecutive month of negative inflation, according to Statistics Lithuania. Inflation is expected to be -0.31% this year. Inflation fell to 0.24% in 2014, from 1.16% in 2013, 3.17% in 2012, 4.12% in 2011, according to the IMF.

Lithuania’s budget deficit was 0.7% of GDP last year, far below the 3% limit under the EU’s stability and growth pact. During the global crisis, the deficit had ballooned to 9.4% of GDP in 2009, and remained high in 2010 at 7.2% of GDP, and 8.9% in 2011. Then in 2012, Lithuania adopted a budget that would narrow the public sector deficit to 3.1% of GDP, in a bid to join the eurozone.

Government debt was 40.9% of GDP in 2014, well below the 60% threshold.

Lithuania joined the Euro on January 1, 2015, the bloc’s 19th member. Lithuania was refused euro entry once before, in 2006, after it failed to meet the inflation criteria.

The Social Democrat-led government, which came into power in December 2012, had vowed that Lithuania would join the euro this year, after the Litas had been pegged to the Euro for a decade.

“We feel the benefits of the membership in the eurozone,” said Prime Minister Algirdas Butkevicius. “The single European currency helps Lithuania withstand external shocks. Lithuania has managed to retain the positive growth.”


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