Estonia's housing market remains strong
February 15, 2018
The national figures released by Statistics Estonia showed more modest house price increases. The average price of Estonian dwellings rose nationally by 4.74% (0.98% inflation-adjusted) during the year to Q3 2017, from y-o-y rises of 4.8% in Q2 2017, 7.73% in Q1 2017, 7.72% in Q4 2016 and 7.38% in Q3 2016. Quarter-on-quarter, apartment prices increased 3.34% in Q3 2017 (2.39% inflation-adjusted).
Over the same period, house prices rose by 6.18% (2.36% inflation-adjusted) while apartment prices increased 4.19% (0.45% inflation-adjusted).
All of the country's major cities experienced robust house price rises during the year to Q3 2017, according to Statistics Estonia:
- In Tallinn, Estonia's capital, the average price of apartments increased 4.38% (0.63 inflation-adjusted), after rising by 8% y-o-y in the same period the prior year.
- In Tartu City, the second largest city and the intellectual capital of Estonia, apartment prices rose by 7% (3.17% inflation-adjusted), up from just 1.76% growth a year earlier.
- In Parnu City, the country's summer capital, located in the southwestern, apartment prices rose by 6.05% (2.25% inflation-adjusted), after rising by 19.63% a year earlier.
- In Estonia excluding Tallinn, apartment prices rose by 10.63% (6.67 inflation-adjusted), after a y-o-y rise of 7.05% in Q3 2016.
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, based on figures from OberHaus.
Demand and supply continue to surge. In 2017, the number of purchase-sale contracts stood at 51,780 units, up by 9.3% from a year earlier and the highest level since 2006, according to Estonian Land Board. Likewise, the value of contracts also increased 13.5% to €3.24 billion over the same period. In Tallinn, the number of purchase-sales contracts increased 11% while the value of contracts surged 17.8%.
Dwelling completions soared by 24.6% y-o-y to 5,895 units in 2017 while building permits climbed 32% y-o-y to 7,947 units.
Estonia's economy grew by about 4.3% in 2017, sharply up from an expansion of 2.1% in 2016 and the fastest growth in five years, according to the country's central bank, Bank of Estonia. The economy is projected to grow by 4.2% this year and by another 3.1% in 2019.
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.
Rental yields moderate in Tallin
Rental yields have risen this past year in Tallinn, the capital of Estonia.
A 40 sq.m. apartment costs around EUR 1,800 per sq. m. (EUR 169 per sq. ft.) while a 120 sq. m. apartment costs around EUR 2,200 per sq. m. (EUR 206 per sq. ft.).
Renting costs, on average, EUR 384 for a 40 sq. m. apartment per month, whereas for a 120 sq. m. apartment (1,291 sq. ft.), monthly rents are around EUR 1,145. Average rents per sq. m. are around EUR 9.4 per month.
Gross rental yields from apartments in Tallinn are moderate, ranging from 5.3% to 6.3%. Smaller apartments tend to earn higher rental returns. A 40 sq. m. apartment has moderate to good rental yields at 6.3%, whereas a 120 sq. m. apartment earns somewhat poorer rental yields at 5.3%.
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: Strong economic growth, falling unemploymentEstonia is a small country of 1.31 million people, with a GDP per capita of €17,400 in 2017, according to the International Monetary Fund(IMF). The most prosperous Baltic state, its success is attributable to bold liberalization measures adopted in the early 1990s. It was the first Former Soviet Union (FSU) state to be invited by the European Union (EU) to start negotiations in 1997, and was formally admitted into the EU in May 2004, a few months after joining NATO. Then in January 2011, the euro became the official currency of Estonia.
Estonia’s economy grew strongly by about 4.3% in 2017, the fastest growth in five years, according to the country’s central bank, Bank of Estonia.
The economy is projected to grow by 4.2% this year and by another 3.1% in 2019.
From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually, including resounding 10.4% GDP growth in 2006, and 9.5% growth in 2005. In 2007, GDP growth was 7.9%, one of the highest growth rates in the EU. Unemployment fell from 13% in 2000, to just 4.6% in 2007.
The economy contracted by a staggering 14.7% in 2009 after the financial crisis. It a recovered with astounding growth of 7.6% in 2011, with strong exports. Unemployment fell to 12.3%. Then in 2012, the economy expanded by a robust 5.2%, bolstered by construction and export growth.
However the economy slowed sharply in 2013, with real GDP growth rate of just 1.6%, mainly due to weak exports and rising inflation. It grew by 2.9% in 2014 and by just 1.1% in 2015, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia. In 2016, Estonia’s economy expanded by a very modest 1.6%. As a result, unemployment increased to 6.8% in 2016, according to Statistics Estonia.
In 2017, the jobless rate fell to 5.8%, the lowest level since 2008, as reforms encourage pensioners to reenter the labor market.
In Q3 2017, average monthly gross wages and salaries stood at €1,201, up from €1,146 in 2016 and €1,065 in 2015, according to Statistics Estonia.
In 2016, average monthly gross wages and salaries rose 7.6% to €1,146 from a year earlier, according to Statistics Estonia.
Nationwide inflation accelerated to 3.4% in 2017, up from 0.1% in 2016, -0.5% in 2015, -0.1% in 2014, and 2.8% in 2013. Consumer prices are projected to increase by 3.1% this year and 2.6% in 2019, according to the European Commission.
Estonia has the lowest national debt level in the European Union, at just about 8.7% of GDP in 2017, down from 9.6% of GDP in 2016. In 2017, the country was estimated to have registered a balanced budget, from surpluses of 0.3% of GDP in 2016, 0.1% in 2015 and 0.7% in 2014.