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Investment Analysis of Estonian Real Estate Market

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Estonia’s housing market remains healthy

Lalaine C. Delmendo | June 20, 2022

After a decade-long of uninterrupted house price rises, Estonia’s housing market remains fundamentally healthy, despite the economic repercussions of the Covid-19 pandemic, the worldwide surge in inflation, and the ongoing invasion of Russia of Ukraine.


The nationwide dwelling price index rose by 14.4% during the year to Q1 2022, following y-o-y increases of 10% in Q4 2021, 13% in Q3, 11.2% in Q2 and 9.8% in Q1, according to Estonia’s State Statistical Office. However, when adjusted for inflation, prices actually increased by just 1.4% - with the huge gap due to a surge in inflation in recent months.

Source: European Central Bank

Quarter-on-quarter, house prices rose by 4.2% (-0.3% inflation-adjusted) in Q1 2022.

By property type:

  • Apartments: prices rose by 19.8% during 2021, following annual increases of 4.1% in 2020, 9.2% in 2019 and 5.7% in 2018, according to Statistics Estonia. But when adjusted for inflation, the increase is more muted at 6.2%.
  • Houses: prices surged 21.7% during 2021, after increasing by 6.5% in 2020, 5.8% in 2019 and 5.6% in 2018. When adjusted for inflation, house prices increased 7.9% last year.

In Tallinn, the country’s capital, the average price of apartments rose by 15% during 2021, to €2,433 per square metre (sq. m.), an acceleration from the previous year’s 4.9% growth, according to Ober Haus. For new apartments, the average price reached €3,122 per sq. m. while for existing apartments, the price increased to €2,303 per sq. m.

“Reasons behind the increased prices for apartments include overall growth in demand, lower interest rates, rising incomes, high inflation expectations predictions and the purchase of apartments for investment purposes,” said Ober Haus.

Demand remains robust. During 2021, the total number of purchase-sale contracts of dwellings in Estonia rose by a huge 21%, following annual increases of 2.8% in 2020, 5.6% in 2019 and 5.5% in 2018, according to the Estonian Land Board. It was the highest number of sales since 2006. In the first five months of 2022, purchase-sale contracts were down by 16.2% from a year earlier but remain one of the highest sales numbers ever recorded.

Yet residential construction activity is falling. In Q1 2022, dwelling completions fell by 27.1% from a year earlier, following a decline of 11.1% in 2021, based on figures from Statistics Estonia.

The outlook for Estonian housing market in 2022 remains positive, but Russia’s invasion of Ukraine poses a wider threat to the Baltics and perhaps specially to Estonia.

“The prospects of the real estate market seemed especially good for 2022 since all the fundamental factors that promote the market remained relevant up to the beginning of 2022,” said Ober Haus. “However, the Russian invasion of Ukraine in February 2022, has caused a global geopolitical and economic crisis. The ongoing war threatens, to a greater or lesser extent, economic development globally. And the Baltic countries, due to their geographical position, cannot but be affected by these events.”

Estonia dwelling price index

Estonia’s economy grew strongly by 8.3% in 2021 from a year earlier, a strong recovery from a 3% contraction seen in 2020, according to preliminary data released by Statistics Estonia. Compared to 2019, the economy grew by 5.2%, thereby exceeding pre-pandemic levels. However, economic growth is expected to slow, with the European Commission projecting GDP growth for Estonia of just 1% in 2022, amidst the Ukraine crisis.

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

After the break-up of the Soviet Union in 1991, housing construction in Estonia dramatically decelerated. In 2001 housing construction began to pick up, and 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 rises 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 (%)

Year Nominal Inflation-adjusted
2007 5.17 -3.55
2008 -19.64 -25.71
2009 -33.59 -32.30
2010 12.88 7.33
2011 11.76 7.30
2012 5.84 2.09
2013 15.56 13.83
2014 10.05 10.63
2015 5.12 5.64
2016 7.72 6.32
2017 4.88 1.07
2018 5.70 1.91
2019 8.19 6.36
2020 4.80 6.00
2021 20.42 10.13
Sources: Statistics Estonia, Global Property Guide

Then came the crash. Estonia’s house price falls in 2008 were among the biggest in the world, rivalled 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). Dwelling completions began to rise in 2014, growing by 32.6% y-o-y to about 2,756 units. Completions have been increasing since, registering an annual average growth of almost 20% in 2015-20, until the completion slowdown in 2021-22.                                    

Housing market prices have been continuously rising since, with prices rising by an average of about 8% (6.1% inflation-adjusted) annually from 2011 to 2020. Then in 2021, house price rises accelerated further to 20.4% (10.1% inflation-adjusted), amidst improving economic conditions.

Sales remain strong

During 2021, the total number of purchase-sale contracts of dwellings in Estonia rose by a huge 21% y-o-y to 60,736 units, following annual increases of 2.8% in 2020, 5.6% in 2019 and 5.5% in 2018, according to the Estonian Land Board. It was the highest sales since 2006. Likewise, the value of contracts surged 49.4% to €5.55 billion over the same period.

Estonia property sales contracts

During 2021:

  • In Tallinn, the number of purchase-sales contracts rose strongly by 22.2% y-o-y while the value of contracts increased 48.1%.
  • In Tartu, the number of purchase-sale contracts rose by 28.6% while the value of contracts surged 49.5%.
  • In Parnu, the number of purchase-sale contracts soared by 35.9% and the value of contracts increased almost 65%.                               

In the first five months of 2022, the number and value of purchase-sale contracts of dwellings in Estonia fell by 16.2% and 29.5%, respectively, as compared to the same period last year. Yet they remain some of the highest sales ever recorded.

Supply falling; construction activity slowing

By end-2021, the number of apartments being offered in Tallinn was by 35% lower compared to the previous year, according to Ober Haus’ 2022 Real Estate Market Report.

Estonia construction activity

Supply is expected to remain low in the medium term, amidst slowing construction activity. During 2021, the total number of dwellings completed in Estonia fell by 11.1% y-o-y to 6,735 units, in contrast to an increase of 8.1% in 2020 and 8.4% in 2019. Then in the first quarter of 2022, dwelling permits fell by 11.4% y-o-y to 1,851 units and completions dropped again by 27.1% to 1,240 units.                                                              

In 2021, the total housing stock reached 739,000 units, up 1.2% from a year earlier, according to Statistics Estonia.

Good rental yields, rents surging                                                                                                              

Gross rental yields for apartments in Tallinn are good, ranging from 6.4% to 7.7%, except in the upscale Vanalinn, according to 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.     

Because of the risks associated with the Ukraine crisis, there has been a significant drop in the number of rental units offered in the Estonian market in recent months, resulting in a surge in rental rates by about 10% to 20%, according to UUS MAA Kinnisvarabüroo’s Estonian Real Estate Review, March 2022.

"The war between Russia and Ukraine has brought some changes to the real estate market, even though its impact on the sales-purchase transactions in March was not too great. Bigger changes have taken place on the market of Tallinn, which is always the first one to respond, whether the news is positive or negative.

"In the rental market of Tallinn, the number of offers has dropped by about 40% in the past few months, the price level has increased by 10% to 20%. The risk level in the rental business has increased: the number of people with unknown background and with no history in Estonia has increased tremendously. Thus, next to good Samaritans, a number of distrustful people have emerged, which makes it difficult to let apartments to the refugees, or people want to manage rental-related risks (indefinite rental agreements, guarantees).

"..In the sales market – there are more people who sell to keep liquidity or go for panic sales. The number of apartment offers that was around 2,000 in Tallinn at the beginning of the year has increased to 2,200 to 2,300 in March and April.

"[However]... the signs are still rather confusing, but there has been no significant decline in activity. Regardless of the increased number of offers, there is no reason to hope for a price drop in the situation where the input prices rapidly increase....Due to a risk of an increase in interest rates, the number of refinancing cases of loans has also dramatically increased."   

Tartu, Pärnu and Narva are vibrant, but tend to react to events with a delay to Tallinn.

Mortgage rates remain more or less steady

In April 2022, the average interest rate on outstanding housing loans was 2.o1%, unchanged from a year earlier, according to the European Central Bank (ECB).

By original maturity:

  • Up to 1 year: 3.11%, down from 3.29% in April 2021 and 3.57% in April 2020
  • Over 1 and up to 5 years: 5.59%, sharply down from 6.34% in April 2021 and 6.6% in April 2020
  • Over 5 years: 1.97%, unchanged from a year earlier but slightly down from 1.95% two years ago
                                     

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 7% in the past six years.

Estonia housing loans

In April 2022, the value of housing loans outstanding rose strongly by 10.2% to about €9.78 billion from the same period last year, driven by low interest rates, according to figures from the Bank of Estonia.

However as a percent of GDP, the size of the mortgage market stood at 31% in 2021 – almost unchanged in the past decade.

Mortgage loans are typically offered in euros with maturities up to 30 years.

Strong economic recovery, but outlook clouded by uncertainty

Estonia’s economy grew strongly by 8.3% in 2021 from a year earlier, a strong recovery from a 3% contraction seen in 2020, according to preliminary data released by Statistics Estonia. In fact compared to 2019, the economy grew by 5.2%, thereby exceeding pre-pandemic levels.

“The growth was driven by manufacturing which climbed back to the pre-pandemic level. The economy was also boosted by information and communication, transportation and storage, and professional, scientific and technical activities. Accommodation and food service activities, which have been ravaged by the coronavirus crisis, continued to grow at a very rapid rate,” said Statistics Estonia. “The main activities that hampered economic growth were trade and agriculture due to price increases in these sectors. The energy sector remained at the same level year on year despite the increase in prices.”

Estonia gdp inflation

However, the outlook is now uncertain amidst the ongoing Ukraine crisis. Recently, the European Commission slashed its 2022 GDP growth forecast for Estonia to just 1% - the lowest in the European Union.

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.  Though it recovered with 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.

The following years 2017-19 saw average annual GDP growth of 5%, 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. The jobless rate fell slightly to 6.2% last year.  The European Commission expects unemployment to rise again to 6.8% this year and to 6.9% in 2023.

Estonia’s national debt stood at 18.1% of GDP last year, slightly down from 19% of GDP in 2020 but far higher than the debt of 8.6% in 2019 and 8.2% in 2018, according to the Eurostat. Despite the increase in the past two years, it remains the lowest debt level in the European Union. inflation accelerated to a record high of 20% in May 2022, up from 18.8% in April and 15.2% in March, according to Statistics Estonia. Inflation had averaged 2.5% from 2011 to 2021.

Following Russia’s invasion of Ukraine, Estonian Prime Minister Kaja Kallas has been calling for NATO and EU allies to increase its defense in the region, especially in the Baltics, as a deterrent to Russia’s aggression.

Estonia unemployment

“If Putin wins, or if he even has the view that he has won this war, his appetite will only grow. And that means he will consider other countries. That’s why we have to do everything we can to stop him now,” said Kallas.

“Russia has increased the pressure or aggression on their side, so NATO should also increase the defence on the other side to be equal deterrent to the aggression that Russia poses,” Kallas added.

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.


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