Estonia's housing market remains strong, despite pandemic
Lalaine C. Delmendo | April 30, 2021
The nationwide dwelling price index rose by 4.8% during 2020 (6% inflation-adjusted), following y-o-y rises of 8.2% in 2019, 5.7% in 2018, 4.9% in 2017 and 7.7% in 2016, according to Statistics Estonia. In Tallinn, the country's capital, the average price of apartments in Tallinn increased 4.9% during 2020 to €2,124 per square metre (sq. m.), according to Ober Haus.
By property type:
- Apartments: prices rose by 4.1% (5.3% inflation-adjusted) during 2020, following annual increases of 9.2% in 2019 and 5.7% in 2018, according to Statistics Estonia.
- Houses: prices rose by 6.5% (7.7% inflation-adjusted) during 2020, after increasing by 5.8% in 2019 and 5.6% in 2018.
Quarter-on-quarter, nationwide dwelling prices increased 3.8% (4.2% inflation-adjusted) in Q4 2020.
The average price of dwellings in Estonia was €1,404 per square meter (sq. m.) during 2020, up 7.1% from a year earlier, according to the Bank of Estonia. New apartments cost around €2,300 to €5,000 per sq. m. in the city centre and €1,500 to €2,200 per sq. m. in the residential districts.
Despite a decline in the number of foreign homebuyers due to coronavirus-related travel restrictions, overall demand continues to rise. In the first four months of 2021, the number of purchase-sale contracts rose by a huge 28.4% y-o-y to 18,571 units, following an annual rise of 2.5% in 2020, according to Estonian Land Board. In Tallinn, the number of purchase-sale contracts soared by 33% y-o-y in 2020.
“Last year, we had less transactions with foreign buyers, mainly because of travel restrictions,” said Gunnar Savisaar, a notary in Tallinn. “However, the numbers have remained strong, which might be seen as a sign of a strong and healthy internal market for real estate.”
This is supported by Ebe-Kai Mutso of Baltic Sotheby's International Realty:“I know the numbers show we've had fewer foreigners buying, but I've had more inquiries and requests than I normally do, perhaps because throughout Europe people have been relocating, and Estonia is in a good location.”
Residential construction is also resilient. The total number of dwellings completed in Estonia rose by 8.1% to 7,579 units in 2020 from a year earlier, according to Statistics Estonia. Yet in Tallinn, completions have been more or less steady last year.
Estonia's economy contracted by about 2.9% in 2020, in contrast to the previous year's 5% expansion, due to the COVID-19 pandemic, according to the European Commission. The economy is expected to grow by a modest 2.6% this year and by another 3.8% in 2022.
Foreign individuals and companies are allowed to acquire real estate with the permission of the local authorities. There are legal restrictions on acquiring agricultural and woodland of 10 hectares or more, and permission from the county governor is needed. Foreign individuals are not allowed to acquire land located in smaller islands, or listed territories adjacent to the Russian border.
Yields rising in Talinn, Estonia
Gross rental yields in Talinn, Estonia - the return earned on the purchase price of a rental property, before taxation, vacancy costs, and other costs - are quite attractive, significantly higher than they were a few years so (our research suggests that they have risen over the past year). Gross rental yields are an important consideration even for those who do not intend to become landlords, because a high rental yield indicates that the property market is reasonably priced.
Gross rental yields on apartments range from 6.4% to 7.7%, except in the upscale Vanalinn. Smaller apartments tend to earn higher rental returns. These rising yields are despite the fact that house prices in Talinn continue to rise. They remain however very reasonable at between EUR 1,650 to EUR 2,200 per square metre (sq. m.) or EUR 144 to 205 per square foot.
Round-trip transaction costs on residential property in Tallinn (i.e. the costs of buying and selling the property are low. See our round trip transaction costs (i.e. buy/sell costs) of buying a property in Estonia and property transaction costs in Estonia compared to the continent.
Round-trip transaction costs on residential property in Tallinn are low.
Taxes are high in Estonia
Rental Income: Nonresident individuals are liable to pay 21% withholding tax on their gross income. No deductions and personal allowances are given. Withholding taxes are final taxes, so the non-resident has no obligation to file tax returns.
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.
Roundtrip Estonian transaction costs are very low
Total transaction costs are between 2.57% and 5.59%. The main cost is the realtor’s fee, which varies between 2% to 4% depending on the size of the apartment. All costs are paid by the buyer.
The Estonian tenancy term trap
Estonian rental market practice is pro-tenant.
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.
Estonia’s economy to recover in 2021Estonia’s economy contracted by about 2.9% in 2020, in contrast to the previous year’s 5% expansion, due to the COVID-19 pandemic, according to the European Commission. The economy is expected to recover this year, with a projected real GDP growth rate of 2.6% and another 3.8% in 2022.
From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually. Unemployment fell from 14.6% in 2000, to just 4.6% in 2007.
The economy then contracted by a staggering 14.7% in 2009, following a decline of 5.4% in 2008, amidst the global financial crisis.
It recovered with astounding growth of 7.6% in 2011, with strong exports. Economic growth slowed to an annual average of 2.5% from 2012 to 2016, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia.
Estonia saw strong economic growth in the following years, with annual average GDP growth of 5% in 2017-19, mainly driven by strong exports, construction, and manufacturing.
As a result, unemployment dropped to a record low of 4.4% in 2019. However in 2020, the nationwide jobless rate increased to 6.8%, due to coronavirus-induced layoffs. according to Statistics Estonia.
Estonia’s national debt rose sharply to about 18.2% of GDP last year, from just 8.4% of GDP in 2019. Yet it remains the lowest debt level in the European Union. The country recorded a deficit of 4.9% of GDP last year, in contrast to a surplus 0.1% of GDP in 2019.
Inflation increased to 1.1% in March 2021, up from 0.6% the previous month and the highest level since February 2020, amidst a surge in the cost of electricity. Inflation is projected to rise to 1.2% this year and to 2.1% in 2022, according to the European Commission.
KajaKallas, the leader of the Reform Party, has become Estonia’s first female prime minister after Estonian president KerstiKaljulaid nominated her to form the government on January 14, 2021 – after the collapse of the previous governing coalition, led by the Centre Party. Estonia has thus become the only country in the world where both the president and the prime minister are women.