Latvia's house price rises are slowing
Lalaine C. Delmendo | December 10, 2018
According to Arco Real Estate's figures, apartment prices in Riga rose by 4.89% (1.64% in real terms) to €794 (US$900) per sq. m. during the year to end-Q3 2018, down from 7.22% in Q3 2017. Quarter-on-quarter, house prices rose by just 0.38% (0.63% in real terms) in the latest quarter.
Real estate agent Ober Haus, which tends to deal in high-end city-centre housing, while Arco deals in the estates, shows more muted growth, with the average apartment prices in Riga rising by 3.59% y-o-y in August 2018 to €1,240 (US$1,406) per square metre (sq. m.), a sharp slowdown from last year's 6.59% growth.
When adjusted for inflation, apartment prices rose by a meagre 0.76%.
Outside Riga, apartment prices continue to rise rapidly.
- In Ogre, one of Latvia's greenest towns due to its amazing parks and forests, the average apartment price increased about 11% during the year to September 2018 to €594 (US$673) per sq. m.
- In Kauguri, a popular residential area in the western part of Jurmala, the average apartment price rose by 9.1% y-o-y in September 2018, to €564 (US$639) per sq. m.
- In Salaspils, mostly known for its military history, the average apartment price rose by 7.2% y-o-y in September 2018, to €644 (US$730) per sq. m.
- In Jelgava, a hospitable city located on the banks of the River Lielupe, the average apartment price rose by 7.3% during the year to September 2018 to €499 (US$566) per sq. m.
In October 2018, the total number of apartments offered for sale in Riga plunged by 15% from a year earlier, according to Arco Real Estate. Likewise, apartments offered for sale in the country's largest housing estates were also down 11% over the same period. This reflects insufficient supply, which explains why during the first five months of 2018, apartment transactions in Riga fell by 2.2% to 3,731 units compared to the same period last year, according to Ober Haus, despite strong demand.
The Riga neighborhoods with the highest demand include Purvciems, Kengarags, Imanta, and Plavnieki. Strong demand is also recorded in Ziepniekkalns, Jugla, Iļģuciems and Vecmīlgrāvis.
Why the strong demand? Partly because foreigners get a five-year residence permit in Latvia if they buy residential real estate, under Immigration Law amendments implemented on July 1, 2010. The conditions were then (according to Baltic Legal):
- The transaction should exceed €142,000 (US$ 160,992) in Riga or Jurmala, or €71,000 (US$ 80,496) in other regions;
- Only non-cash funds may be used to buy real estate;
- The buyer must not have any real estate tax arrears in Latvia (and must never have had such arrears);
- Transaction concluded after July 1 2010.
Since the foreign real property buyer visa scheme was launched in July 2010, most foreign buyers have been Russians, looking for properties in Riga and Jurmala. Latvia has one of the lowest house prices in Europe, and foreigners now account for 70% of all property transactions. In recent years, most of the in-demand properties were located in Jurmala, according to the Office of Citizenship and Migration Affairs. Russians have made the most purchases, followed by Ukrainians, Chinese, Kazakhs, and Uzbeks, according to Arco Real Estate's chairman of the board of directors, Aigars Smits.
In September 2014, Immigration Law amendments increased the threshold for obtaining a residence permit and introduced other conditions and costs, if a foreigner's real estate was registered in the Land Register after September 1, 2014:
- Minimum transaction value of real estate located anywhere in Latvia must be €250,000 (US$ 283,437).
- The total cadastral value of the property at the time of acquisition should be at least €80,000 (US$ 90,700).
- Payment of a state budget contribution worth 5% of the real estate's transaction value.
“We expect that in 2018 the average price growth will continue to increase, but will not exceed [2017's] growth rate which was 6-7% per annum,” said BALSTS CEO Aigars Zarins.
In the third quarter of 2018, the economy grew by 4.8% from the same period last year, slightly down from the previous quarter's 5.3% y-o-y growth, according to the Central Statistical Bureau of Latvia (CSB). The economy is projected to grow by 4.1% this year, from annual expansions 4.6% in 2017, 2.2% in 2016, 3% in 2015, 1.9% in 2014, 2.4% in 2013, and 4% in 2012, according to the European Commission.
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 5.7% for a 50 square metre (sq. m.) apartment. Such an apartment might cost around EUR 450 per month to rent, but around EUR 90,000 to buy.
These are moderately good yields. But in the centre larger apartments of 120 sq.m. yield only 3.8%. Our research suggests that 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. EUR 275,000 is a typical price for a 120 sq. m. apartment in the centre, while EUR 300,000 is typical for a 120 sq.m. flat in Jurmala, but the rent you might get on the latter seems to be 1/3 higher, bringing yields up to 4.8%.
The property market's recovery began in 2010 and accelerated in 2011, but since then the market has been much quieter.
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.
Strong economic growthOn January 1, 2014, Latvia adopted the euro. Its adoption is a recognition of economic success, especially in taming inflation and limiting the budget deficit to just 0.6% of GDP in 2017, according to the European Commission. The deficit is expected at around 0.8% this year and at 1% in 2019.
In the third quarter of 2018, the economy grew by 4.8% from the same period last year, slightly down from the previous quarter’s 5.3% y-o-y growth, according to a flash estimate released by the Central Statistical Bureau of Latvia (CSB). The strong growth was fuelled by booming construction sector, coupled with robust retail trade and industrial sectors.
The economy is projected to grow by 4.1% this year, from annual expansions 4.6% in 2017, 2.2% in 2016, 3% in 2015, 1.9% in 2014, 2.4% in 2013, and 4% in 2012, according to the European Commission.
Latvia’s public debt was projected to fall to 37.1% of GDP in 2018 and to 35.5% of GDP in 2019, from 40% in 2017, according to the European Commission.
In Q2 2018, nationwide unemployment stood at 7.7%, down from 8.2% in the previous quarter and 8.9% a year earlier, according to the CSB. The country’s jobless rate averaged 17.1% from 2009 to 2012 and 10.2% from 2013 to 2017.
Inflation was 3.2% in October 2018, up from 2.8% a year earlier, according to the CSB. In 2017, overall inflation surged to 2.9%, from just 0.1% in 2016, according to the International Monetary Fund (IMF).
Latvia has officially become the 35th member of the prestigious OECD in July 2016.
In February 2016 PM Kučinskis took office after former PM Laimdota Straujuma resigned in December 2015, due to the infighting within the ruling coalition. PM Kučinskis’ government has focused on strengthening the economy and dealing with growing concerns about neighboring Russia.
However, the future of his government is now uncertain after the ruling coalition lost its majority during the October 2018 general election, with the pro-Russian Harmony party emerging as the largest bloc in parliament, winning about 20% of the votes. Right-wing populist parties, KPV LV and the New Conservative Party, also performed well, winning 14.1% and 13.6% of total votes, respectively.
PM Kučinskis’ governing coalition only won more than 27% of votes (Union of Greens and Farmers with 9.9%; the National Alliance with 11%; and the Unity party with 6.7%). Their support was hit by public dissatisfaction over the fight against money-laundering and corruption.
Harmony has recently said that it wants Latvia to stay in the EU and NATO, but also to have closer economic ties with Russia. It is now under coalition talks with the right-wing populist parties. During the previous election, Harmony also won the most seats in parliament but was blocked from power when other parties refused to work with it due to its ties with Russia.
Latvia’s relations with Moscow deteriorated following Russia’s annexation of Crimea in 2014. Russia’s aggression prompted Estonia, Lithuania, and Latvia to seek NATO troop deployments in their nations. Article 5 of NATO’s charter states that a military attack on one member state is an attack on all of them.
However recently, relations between Russia and Latvia improved after an agreement was signed in November 2017 on easing the procedures on mutual journeys of border residents of the two countries; and the plan of cooperation between the two countries for 2018-2019. The agreement also provides for closer cooperation in such areas as security, cooperation in international organizations, and the Baltic Sea region, among others, according to Andrejs Pildegovics, Latvia’s State Secretary of the Ministry of Foreign Affairs.