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Jun 15, 2014

Lithuania's property market recovering

by Lalaine C. Delmendo


Lithuania house pricesLithuania’s property market is now recovering, amidst healthy economic growth. House prices are gradually rising. Demand is surging. Construction activity is rising again.

The apartment price index for Lithuania’s five major cities (Vilnius, Kaunas, Klaipėda, Šiauliai and Panevėžys) increased by 2.88% (2.68% inflation-adjusted) during the year to end-Q1 2014, based on figures released by Ober Haus Real Estate Advisors. This was the second quarter of annual house price increases, after rising by 1.12% (0.76% inflation-adjusted) year-on-year in Q4 2013.

On a quarterly basis, apartment prices rose by 1.8% (1.54% inflation-adjusted) during Q1 2014.

In Vilnius, the capital, apartment prices rose 5.04% to €1,251 per square metre (sq. m.) in Q1 2014 from a year earlier. When adjusted for inflation apartment prices increased 4.83%.

A quick snapshot of house prices elsewhere in Lithuania in March 2014:

  • In Kaunas, the average price of newly-constructed flats was €1,400 per sq. m., versus €1,250 per sq. m. for existing flats
  • In Klaipėda, the average price of new flats was €1,450 per sq. m, versus €1,200 per sq. m for existing flats.
  • In Šiauliai, the average price of newly-built flats was €850 per sq. m. , versus €700 per sq. m. for existing flats
  • In Panevėžys, existing flats had an average price of €600 per sq. m.
  • In Druskininkai, the average price of newly-constructed flats was €1,600 per sq. m., versus €900 per sq. m. for existing flats

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

  • In 2008, house prices fell by 13.7% (-20.5% inflation-adjusted)
  • In 2009, house prices plunged by 30.3% (-31.2% inflation-adjusted)
  • In 2010, house prices increased by a meagre 0.1% (-3.6% inflation-adjusted)
  • In 2011, house prices rose slightly by 0.8% (-2.6% inflation-adjusted)
  • In 2012, house prices dropped 1.4% (-4.1% inflation-adjusted)
  • In 2013, house prices increased by 1.1 (0.8% inflation-adjusted)

The residential construction activity in the country is increasing.

  • The total number of building permits for the construction of new residential buildings surged by 22.2% to 6.571 units, based on figures from Statistics Lithuania.
  • The total number of new residential buildings completed rose by 8.4% to 3,467 units in 2013 from a year earlier.

Demand is surging. The total number of transactions for detached houses in the country surged by 27% in the first quarter of 2014 from a year earlier, to an average of 680 units per month, according to the Centre of Registers. Likewise, the total number of apartment transactions also soared by 48% y-o-y in Q1 2014, to an average of 2,735 units per month.

In Vilnius alone, the number of new apartments sold skyrocketed by 76% in Q1 2014 from the same period last year, to 930 units, according to Ober Haus.

In 2013, Lithuania’s economy grew by a healthy 3.3%, after expanding by 3.6% in 2012, according to Statistics Lithuania. The economy is expected to expand by 3.3% this year and by another 3.7% in 2015, according to the European Commission (EC). Lithuania is expected to adopt the euro in January 1, 2015.

That crazy house price boom

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.

Booms in other cities, a nation mortgaged

Major price increases were also seen in other major cities. In Klaipeda, Lithuania’s third largest city and only seaport, the average price of one-room apartments rose 282% from LTL2,200 (€637) per sq. m. in 2003, to LTL9,000 (€2,607) per sq. m. at end-2007.

Mortgage debt rose from a mere 0.4% of GDP in 2000, to 19% of GDP in 2008, with about 80% of all purchases made with the aid of mortgages, and typically 95% of property value granted in loans.

Total outstanding housing loans in Lithuania increased by 3.1% to LTL4.47 billion (€1.29 billion), according to the Bank of Lithuania - still 38.9% lower than the peak levels seen in September 2007, when total housing loans were about LTL7.32 billion (€2.12 billion).

Interest rates and currency risk

Lithuania interest and mortgage rates graph

Recently, interest rates on Lithuania litas (LTL) housing loans have increasingly reflected worries about currency risk.

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 they 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 litas-dollar peg lasted from 1994 to January 2002 (US$ 1 = LTL4), and 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.

Lithuania new housing loans graph

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 interest 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. If the litas does disconnect from the euro, the consequences for borrowers would be disastrous.

In September 2012, the average interest rate paid by households for a housing loan denominated in Lithuania litas (LTL) dropped to 3.29%, from 3.88% in the same period last year, according to the Bank of Lithuania.

Construction activity improving

Lithuania dwellings construction graph

During the 1980s, when the country was still under socialism, more than 20,000 dwelling units were constructed annually.

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
  • In 2009, completions dropped to 9,400 units due to the economic crisis.

In 2009, completions dropped to 9,400 units, due to the economic crisis.

The number of unfinished dwelling units was alarming. From 2005 to 2008, 15,000 dwellings were authorized annually - around three times the number of completions. While some authorized dwellings may never have gone beyond the drawing board, the amount of ongoing construction in Lithuania, especially Vilnius, suggests that many are still being built – but are not yet finished.

The drop in construction activity was also reflected in the drop in the number of dwellings authorized; from 19,229 units in 2007 to 15,928 in 2008 and 7,553 in 2009.

The residential construction activity in the country is increasing again.

  • The total number of building permits for the construction of new residential buildings surged by 22.2% to 6.571 units in 2013, based on figures from Statistics Lithuania.
  • The total number of new residential buildings completed rose by 8.4% to 3,467 units in 2013 from a year earlier.

Rental yields in Vilnius back to normal levels

Lithuania Vilnius average rent apartments graph

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 apartment price and rent graph

In Vilnius, rental yields are back to normal. Gross rental yields on apartments in the city centre range from 4.13% to 5.68%. In the suburbs, rental yields range from 4.40% to 5.38%. These are moderate but acceptable yields, and suggest that a certain stability has returned to the housing market.

Lithuania hopes to adopt the euro in 2015

Lithuania GDP growth graph

After average growth of 8.1% 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%, the second fastest pace in the EU. In 2013, Lithuania’s economy grew by a healthy 3.3%, after expanding by 3.6% in 2012, according to Statistics Lithuania.

In 2014, real GDP growth is projected at 3.8%, fuelled by strong domestic demand and a recovery in the real estate and construction sectors, based on government estimates. The European Commission released a more conservative economic growth forecast for Lithuania of 3.3% this year, before expanding by 3.7% in 2015.

“Substantial wage increases, low inflation, falling unemployment and strong confidence indicators boosted consumption," said the European Commission (EC).

Lithuania unemployment

The country’s overall unemployment rate dropped to 11.8% in 2013, from 13.4% in 2012, 15.4% in 2011, 17.8% in 2010, and 13.8% in 2009, according to the International Monetary Fund (IMF). The unemployment rate is expected to fall further to 10.6% in 2014 and to 9.7% in 2015, according to the EC.

In 2013, the overall inflation rate stood at 1.2%, from 3.2% in 2012, 4.1% in 2011, 1.2% in 2010, 4.2% in 2009, and 11.1% in 2008, according to the IMF. The country’s inflation is expected to remain subdued this year at 0.9%, and to pick up slightly in 2015 to 1.5%, according to Bank of Lithuania.

In a bid to join the Eurozone this year, Lithuania adopted a budget this year that would narrow the public sector deficit to 1.9% of GDP, down from a deficit of 2.9% of GDP in 2013 and far below the 3% limit under the EU’s stability and growth pact.

Moreover, the Lithuanian government’s debt burden currently stands at just 40% of GDP, well below the 60% threshold.

The Social Democrat-led government, which came into power in December 2012, has vowed that Lithuania will join the euro this year. The Litas has been pegged to the Euro for a decade. With low inflation rates, the country is expected to become the currency bloc’s 19th member on January 1, 2015. Lithuania was refused euro entry once before, in 2006, after it failed to meet the inflation criteria.


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