Estonia’s housing market remains strong, despite pandemic
Lalaine C. Delmendo | May 18, 2021
After a decade-long of uninterrupted house price rises, Estonia’s housing market remains fundamentally strong, despite the economic repercussions of the COVID-19 pandemic.
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.
A short history of the Estonian property cycle
Estonia’s housing market was in continuous boom from 2000 to 2007. The average price of 2-room flats in Tallinn rose by 448.7% from 2000 to 2007, in Tartu prices rose 431.5% and in Parnu 440%. Prices of three-room flats were equally impressive, rising 412% in Tallinn, 481% in Tartu, and 471.5% in Parnu.
Owner-occupancy rates rose strongly, up from 85% in 2002, to 96% in 2004. The rental market shrank from 12% of households (with 9% privately renting and 3% in social rents) in 2002, to just 4% in 2004.
HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: Statistics Estonia, Global Property Guide|
Then came the crash. Estonia’s house price falls in 2008 were among the biggest in the world, rivaled only by Latvia. House prices plunged by almost 34% in 2009, after falling by 20% in 2008.
Recovery began in 2010, with the average price of dwellings rising by 12.9% (7.3% inflation-adjusted). The housing market has been continuously expanding since, with prices rising by an average of about 8% (6.1% inflation-adjusted) annually from 2011 to 2020.
Sales rising strongly
Demand remains strong despite the pandemic. 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. Likewise, the value of contracts surged almost 44% to €1.54 billion over the same period.
In January-April 2021:
- In Tallinn, the number of purchase-sales contracts soared by 33% y-o-y while the value of contracts increased 53.7%.
- In Tartu, the number of purchase-sale contracts rose by 42.5% while the value of contracts surged 59.3%.
- In Parnu, the number of purchase-sale contracts rose by 14% and the value of contracts increased 21.9%.
Construction activity continues to increase
Despite pandemic-related restrictions, 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. In Tallinn, completions have been more or less steady last year.
After the break-up of the Soviet Union in 1991, housing construction in Estonia dramatically decelerated. In 2001 housing construction began to pick up, peaking at around 7,000 per year in 2007, but after the financial crisis completions slumped to around 2,000 per year.
Dwelling completions began to rise in 2014, growing by 32.6% y-o-y to about 2,756 units. In Q1 2021, dwelling completions in the whole country increased slightly by 0.5% y-o-y to 1,701 units.
Good rental yields, but rents falling
Gross rental yields for apartments in Tallinn are good, ranging from 6.4% to 7.7%, except in the upscale Vanalinn, according to a Global Property Guide research. Yields have been rising recently despite the fact that house prices in Tallinn continue to rise. They remain however very reasonable at between €1,650 and €2,200 per sq. m. or €144 to €205 per square foot.
Smaller apartments tend to earn higher rental returns. A 40 sq. m. apartment has moderate to good rental yields at 6.3% to 7.7%, whereas a 120 sq. m. apartment earns somewhat poorer rental yields at 5.3%.
Round-trip transaction costs on residential property in Tallinn (i.e. the costs of buying and selling the property are low.
However, rents for apartments in Tallinn have fallen by an average of 10% last year, due to an increase in supply with many AirBnb apartments returning to the long-term rental market, according to Ober Haus.
The number of foreign employees and students has declined remarkably due to travel restrictions. As such, the period for finding tenants has increased substantially last year.
Mortgage rates are rising gradually
In February 2021, the average interest rate on outstanding housing loans was 2%, slightly up from 1.98% a year earlier and 1.9% two years ago, according to the European Central Bank (ECB).
By original maturity:
- Up to 1 year: 3.64%, up from 3.17% in February 2020 and 2.31% in February 2019
- Over 1 and up to 5 years: 6.45%, unchanged from a year earlier but up from 5.92% two years ago
- Over 5 years: 1.96%, up from 1.93% in February 2020 and 1.86% in February 2019
In September 2014, the ECB slashed the key rate to a record low of 0.05%. Then in March 2016 the ECB cut again the key rate to zero where it has remained since.
Mortgage market continues to expand
Estonia’s original house price boom was supported by a massive expansion of the mortgage market which grew by an average of 62% yearly from 2002 to 2006. After 2007, the mortgage market collapsed.
The mortgage market started to recover in 2013 and housing loans have been continuously rising since. Housing loans outstanding rose by an annual average of 6.2% in the past six years.
In Q1 2021, the value of housing loans outstanding rose by 6.7% to about €8.82 billion from the same period last year, driven by low interest rates, according to figures from the Bank of Estonia.
“Low interest on housing loans have encouraged borrowing,” said Ober Haus. “Not only have interest rates in general been low, but the average interest margins demanded by the banks have fallen a little in recent months.”
Mortgage loans are typically offered in euros with maturities up to 30 years.
Estonia’s economy to recover in 2021
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 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.
Kaja Kallas, the leader of the Reform Party, has become Estonia’s first female prime minister after Estonian president Kersti Kaljulaid 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.
- Slower year-on-year increase in the Dwelling Price Index (Statistics Estonia): https://www.stat.ee/en/node/183275
- House Hunting in Estonia: A 19th-Century Manor With Modern Style (The New York Times): https://www.nytimes.com/2021/01/13/realestate/estonia-house-hunting.html
- Economic forecast for Estonia (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/estonia/economic-forecast-estonia_en
- Republic of Estonia At a Glance (International Monetary Fund): https://www.imf.org/en/Countries/EST
- Key economic indicators (Bank of Estonia): https://statistika.eestipank.ee/#/en/p/MAJANDUSKOOND
- Baltics Real Estate Market Report 2021 (Ober Haus): https://www.ober-haus.lt/wp-content/uploads/Ober-Haus-Market-Report-Baltic-States-2021.pdf
- Yields rising in Talinn, Estonia (Global Property Guide): https://www.globalpropertyguide.com/Europe/Estonia/Rental-Yields
- EH04: Granted Building Permits and Completed Dwellings (New Construction, Quarters) (Statistics Estonia): https://andmed.stat.ee/en/stat/majandus__ehitus__ehitus-ja-kasutusload/EH04
- MFI aggregated balance sheet (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691115
- Bank interest rates (European Central Bank): https://sdw.ecb.europa.eu/browse.do?node=9691123
- Labour market (Statistics Estonia): https://www.stat.ee/en/find-statistics/statistics-theme/work-life/labour-market
- Statistics: Estonia´s gross debt level grew to 18 percent of GDP in 2020 (ERR News): https://news.err.ee/1608154135/statistics-estonia-s-gross-debt-level-grew-to-18-percent-of-gdp-in-2020
- Government debt up to 97.3% of GDP in euro area; Up to 89.8% of GDP in EU (Eurostat): https://ec.europa.eu/eurostat/documents/portlet_file_entry/2995521/2-21012021-AP-EN.pdf/a3748b22-e96e-7f62-ba05-11c7192e32f3
- Kaja Kallas becomes Estonia’s first female prime minister (Estonian World): https://estonianworld.com/life/kaja-kallas-to-become-estonias-first-female-prime-minister/