Estonia's house prices continue to rise, albeit at a slower pace
Lalaine C. Delmendo | March 04, 2019
Demand is now falling, yet residential construction continues to rise strongly.
In Tallinn average price of apartments increased by a modest 3.48% to €1,843 per square metre (sq. m) in 2018, according to Ober Haus. In fact when adjusted for inflation, apartment prices in the capital city were almost unchanged in 2018 from the previous year.
Quarter-on-quarter, prices increased by a meagre 0.82% (1.06% inflation-adjusted) in Q4 2018.
Nation-wide there were modest house price increases, according to Statistics Estonia. The average price of Estonian dwellings rose by 4.15% (0.58% inflation-adjusted) during the year to Q3 2018, the lowest annual rise since Q2 2016. During the latest quarter (Q3 2018) apartment prices increased by a minuscule 0.24% (-0.88% inflation-adjusted).
Over the same period, house prices rose by 1.62% (0.49% inflation-adjusted) while apartment prices fell 0.29% (-1.39% inflation-adjusted).
Most of the country's major cities also experienced a deceleration in house price rises during the year to Q3 2018, according to Statistics Estonia:
- In Tallinn, Estonia's capital, the average price of apartments increased 4.31% (0.73 inflation-adjusted), the slowest growth in the past nine quarters.
- In Tartu City, the second largest city and the intellectual capital of Estonia, apartment prices rose by 2.82% (-0.71% inflation-adjusted), from y-o-y rises of 3.42% in Q2 2018, 12.91% in Q1 2018, 7.78% in Q4 2017 and 6.3% in Q3 2017.
- In Parnu City, the country's summer capital, located in the southwestern, apartment prices surged by 15.51% (11.55% inflation-adjusted), from annual rises of 9.96% in Q2 2018, 11.55% in Q1 2018, 12.51% in Q4 2017 and 0.1% in Q3 2017.
- In Estonia excluding Tallinn, apartment prices rose by 3.92% (0.36 inflation-adjusted), a sharp slowdown from a y-o-y rise of 10.63% in Q3 2017.
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.
Demand is now falling
The number of purchase-sale contracts in Estonia fell by 5.5% to 48,925 units in 2018 from a year earlier, according to Estonian Land Board. In Tallinn, the number of purchase-sales contracts dropped 6.4% to 14,524 units over the same period.
Yet dwelling completions have soared, by no less than 15% y-o-y to 6,773 units in 2018. Building permits however have adjusted to current trends, by falling by 11.3% y-o-y to 6,990 units
The economy is slowing
Estonia's economy grew by about 3.5% in 2018, a slowdown from last year's expansion of 4.9%, according to the European Commission. The economy is expected to slow further, with projected GDP growth of 2.7% this year and 2.4% in 2020.
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.
Economic growth slowing but unemployment continues to fallEstonia’s economy grew by about 3.5% in 2018, a slowdown from last year’s expansion of 4.9%, according to the European Commission.
The economy is expected to slow further, with projected GDP growth of 2.7% this year and 2.4% in 2020. But the jobless rate was only 5.4% in 2018, the lowest level since 2008, as reforms encouraged pensioners to re-enter the labor market. In Q3 2018, average monthly gross wages and salaries stood at €1,291, according to Statistics Estonia.
From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually, including 7.7% growth in 2007, resounding 10.3% GDP growth in 2006, and 9.4% growth in 2005. 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. Then in 2012, it expanded by a robust 4.3%, but only 1.9% in 2013, and2.9% in 2014, 1.7% in 2015, and 2.1% in 2016, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia.
In 2017, Estonia’s economy expanded by a robust 4.9%, a sharp improvement. As a result, unemployment fell to 5.8% in 2017.
Nationwide inflation stood at 3.4% in 2018, unchanged from the previous year. Inflation is projected to slow to 2.8% this year and to 2.3% in 2019, according to the European Commission.
Estonia has the lowest national debt level in the European Union, at just about 8.8% of GDP in 2018. The government deficit was 0.5% of GDP last year.