Latvia's housing market has weakened slightly
Lalaine C. Delmendo | July 25, 2021
During the year to Q1 2021, apartment prices in Riga fell by 0.4% (0.6% in real terms) to €817 (US$994) per square metre (sq. m.), according to Arco Real Estate's figures, in contrast to a 2.2% rise the previous year. It was the third consecutive quarter of y-o-y price falls.
Real estate agent Ober Haus, which tends to deal in high-end city-centre housing, says average apartment prices in Riga fell by 0.9% during 2020, following last year's 2.3% growth.
Apartment sales fell by 9.5% to about 8,900 units in Riga in 2020 according to Ober Haus, mainly due to less foreign demand (foreigners account for about 70% of all property transactions in the country). Most transactions were in the neighborhoods of Purvciems, Kengarags, Imanta, Plavnieki, Ziepniekkalns, Jugla, Iļģuciems and Vecmīlgrāvis.
Likewise, new dwellings authorized in Latvia fell by 6.5% y-o-y to 3,101 units in 2020, and the total area dropped 14.7% to 460,000 sq. m., according to the Central Statistical Bureau. The weakness of the construction sector continued in Q1 2021, with the number and area of new dwellings authorized falling further by 0.6% and 32.6%, respectively.
Latvia's economy contracted by 3.5% during 2020, following expansions of 2.2% in 2019, 4.3% in 2018, and 3.8% in 2017, according to the Central Statistical Bureau of Latvia. But economic growth might exceed 3% during 2021, according to the Ministry of Economics, in line with the European Commission's forecast of 3.5% growth.
Small apartments in Riga earn moderately good yields
Gross rental yields, i.e., the gross return on investment in an apartment if fully rented out, in the centre of Riga are 4.4% for a 7 square metre (sq. m.) apartment. Such an apartment might cost around EUR 725 per month to rent, but around EUR 200,000 to buy.
These aren't great yields. But in the Old Town, our research suggests that a typical small apartment of 50 sq.m. can yield 6.1% - not so bad.
In previous years our research suggested that the rents that people are prepared to pay in the centre for these larger apartments are less than they might be prepared to pay, say, in Jurmala, where the flats are mostly new.
The property market´s recovery began in 2010 and accelerated in 2011, then paused. But since 2016 there has been a significant rise in house prices in Riga.
Round trip transaction costs are low to moderate in Latvia. See our Property transaction costs analysis for Latvia and Property transaction costs in Latvia, compared to the rest of Europe
Generous depreciation allowances brings down rental income tax payables
Rental Income: Rental income earned by nonresident property owners are taxed at the standard income tax rate of 20%. Property taxes and depreciation expenses are deductible.
Capital Gains: Capital gains are taxed at a special rate of 20%.
Inheritance: There is no inheritance tax.
Residents: Residents are taxed on their worldwide income at progressive rates, from 20% to 31.40%.
Roundtrip costs are low in Latvia, except for newly-built units
Roundtrip buying costs range from 4.121% to 7.121%. However, this can be as high as 28.121% because of the 21% VAT on newly-built properties. The real estate agent’s commission is negotiable from 2% to 5%.
Latvia is pro-landlord
Latvia’s rental market is generally pro-landlord.
Rents: Rents can be freely agreed between landlord and tenant. Rent control exists only on denationalized buildings.
Tenant Security: Contracts for any period of time are possible, and terminate on the expiry of the term, without need for notice. If the tenant withdraws from the lease, he can in theory be made to pay the entire amount of the lease or rental payment.
Pandemic hits Latvia’s economy, financesLatvia’s economy shrunk 3.5% in 2020, mainly due to pandemic-related restrictions and lockdowns – in contrast to annual average growth of 3.1% in the past five years.
Despite this, the Latvian economy is projected to grow by 3.5% this year and by another 3.1% in 2022, driven largely by a recovery in domestic demand.
The country recorded a budget deficit of 4.5% of GDP last year, a sharp increase from the prior year’s 0.6% shortfall, according to Eurostat - the biggest deficit seen in a decade.
In 2021, the deficit is expected to grow further to €2.9 billion (US$3.5 billion) or about 9.4% of GDP, due mainly to ID-19 support measures, according to the Finance Ministry - ost at par with the record deficit of 9.6% of GDP in 2009.
“Of the money we are currently spending, every fourth euro is borrowed money. Latvia had a record-large budget deficit - at 9.6 percent of GDP - in 2009, in the wake of the severest economic crisis,” said EdvardsKusners of the Bank of Latvia Council.
Latvia’s public debt reached 43.5% of GDP last year, up from 37% in 2019. The public debt is expected to increase further to about 50% of GDP this year.
In 2020, nationwide unemployment increased to 8.1%, up from 6.3% a year earlier, according to the CSB. This is still much lower than the country’s jobless rate from 2009 to 2012, which averaged 17.1%, falling to 9.2% from 2013 to 2019.
Inflation accelerated to 1.7% in April 2021. Inflation had fallen to less than 0.1% last year – the lowest since 2013.
On January 1, 2014, Latvia adopted the euro. Then in July 2016, the country officially became the 35th member of the prestigious OECD.