Covid-19 hits Latvia’s housing market

Lalaine C. Delmendo | July 05, 2021

Latvia’s housing market has weakened slightly, amidst the economic repercussions of the COVID-19 pandemic.

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.

Latvia house prices

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.

Latvia’s housing boom and bust

Latvia had one of the world’s biggest housing market crashes after 2007. In  the second half of 2007 house prices began to fall, having risen almost 700% from 2000 to 2007, and inflation ballooned.

The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.1% in 2007 to 19.5% in 2010, despite Latvia securing a €7.5 billion (US$ 9.1 billion) standby loan from a group led by the European Union (EU) and the International Monetary Fund (IMF).  The bailout prevented total economic collapse, but was coupled with rigid austerity measures. The country’s fiscal deficit shot up, capital left the country, exports fell, and domestic demand collapsed.

  • In 2007, apartment prices fell by 5% (-16.7% in real terms) from a year earlier.
  • In 2008, apartment prices plummeted by 30.5% (-37.1% in real terms) y-o-y
  • In 2009, property prices plunged by another 42% (-41.3% in real terms)

Then in 2010, the housing market started to recover, with house prices rising by 5% (2.4% in real terms) in 2010, 5.8% in 2011 (1.7% in real terms), 2.1% (0.5% in real terms) in 2012, 3.2% (3.3% in real terms) in 2013-14, and 0.4% (zero growth in real terms) in 2015.

Latvia house price indices

The housing market regained its momentum in 2016, thanks to strong economic growth, coupled with limited supply. House prices rose by 7.6% (5.3% in real terms) in 2016 and by another 8.8% (6.5% in real terms) in 2017.

The housing market has lost momentum since, with house price growth slowing to 3.9% (1.3% in real terms) in 2018 and further to 2.8% (0.5% in real terms) in 2019. During 2020, house prices fell 1.5% (-1% in real terms) due to the pandemic.

Demand falling as foreign homebuyers wane

In Riga, apartment sales fell by 9.5% to about 8,900 units in 2020 from a year earlier, according to Ober Haus, amidst a decline in foreign demand due to pandemic-related restrictions.

Foreigners, who accounted for about 70% of all property transactions in the country, have buoyed the market in recent years, attracted to Latvia partly because it has one of the lowest house prices in Europe.  In addition, 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:

  • The transaction should exceed €142,000 (US$171,479) in Riga or Jurmala, or €71,000 (US$85,740) 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.

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 must be €250,000 (US$301,900) in large cities or at least €125,000 (US$150,950) in other places (in which case at least two properties must be bought), according to Baltic Legal.
  • The total cadastral value of the property at the time of acquisition should be at least €80,000 (US$96,608).
  • Payment of a state budget contribution worth 5% of the real estate’s transaction value.

In recent years, most of the in-demand properties were located in Riga and 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.

Residential construction activity falling

The number of new dwellings authorized in Latvia fell by 6.5% during 2020,  to 3,101 units, according to the Central Statistical Bureau.

By region, Zemgale saw the biggest y-o-y fall of 31.2%, followed by Kurzeme region (-28.4%) and Latgale region (21.8%). More modest declines were recorded in the Riga region (-6%) and Pierīga region (-3.6%). Only Vidzeme region registered an annual increase of 51.8% in 2020.

Latvia interest rates

Riga and Pierīga regions accounted for about 89% of all new dwelling authorizations last year.

The weakness of the construction sector continued in Q1 2021, with the number and area of new dwellings authorized falling by 0.6% and 32.6%, respectively.

Rental yields moderate but rental market remains underdeveloped

Apartments located in Riga city can earn yields ranging from 3.8% to 5.7%, according to research conducted by the Global Property Guide. Bigger apartments of around 120 sq. m. have lower yields as compared to smaller units.

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.

Round trip transaction costs are low to moderate in Latvia. See our Property transaction costs analysis for Latvia.

Yet Latvia’s rental market remains poorly developed, according to a study published by the OECD. About two-thirds of the rental market consists mainly of Soviet-era housing and a third of the population live in overcrowded housing units. Only 12% of the country’s housing stock are offered as rental accommodations.

Financing and state support are also insufficient. About 44% of households are unable to qualify for the government’s financial assistance or meet mortgage requirements, the OECD study noted.

Lowish interest rates

The ECB key rate remained at its all-time low of zero in March 2021, unchanged since March 2016.

Housing mortgage rates for new loans, in March 2021:

  • Floating rate and up to 1 year initial rate fixation (IRF): 2.16%, almost unchanged from 2.13% a year earlier
  • 1-5 years IRF: 8.52%, sharply up from 4.83% a year earlier
  • 5-10 years IRF: 9.29%, up from 8.26% a year earlier
  • Over 10 years IRF: 5.37%, down from 5.82% a year earlier

For outstanding loans, in March 2021:

  • Housing loans with maturity of up to 1 year: 2.59%, sharply down from 4.42% a year earlier
  • Housing loans with maturity over 1 year and up to 5 years: 9.14%, slightly down from 9.63% a year earlier
  • Housing loans with maturity over 5 years: 2.27%, almost unchanged from 2.29% a year ago

Mortgage market remains weak

In 2020, the size of the mortgage market was 14.3% of GDP.  There’s been a slight decline since - by 0.4% y-o-y to €4.2 billion (US$5.1 billion) -  despite the introduction of the state-guaranteed Mortgage Loan Programme in 2015, under which the Latvian Development Finance Institution (ALTUM) provides guarantees for mortgage loans, now totalling €118.1 million (US$143.7 million) benefitting 15,888 families with children, and €19.6 million (US$ 23.9 million) benefitting 2,016 young professionals.

Latvia housing loans

Supply of long-term rental units surge; rents hardly moved

Due to the decline in tourism, many previously short-term accommodations are now being offered in the long-term rental market, increasing supply.

Yet rents have hardly moved. “Owners of exclusive apartments have not changed prices,” said Latio.

“Sometimes the rent is negotiated, but such cases have always existed. In the state of emergency, many tenants asked landlords to reduce rents due to declining incomes or lost jobs. For reasons of solidarity, some landlords made concessions to the tenants,” Latio added.

Latvia housing stock

In Riga, monthly rents for two-bedroom apartments in new developments ranged from €260 (US$314) in the southern neighborhood of Kengarags to €550 (US$664) in the upscale neighborhoods of Mezaparks, Kipsala and the city centre particularly in the Old Town, according to Latio.

In other major cities:

  • In Daugavpils, Latvia’s second most populous city next to Riga, apartment rents ranged from €130 (US$157) to €195 (US$235) per month.
  • In Jelgava, a city in central Latvia and considered as the country’s railway centre, apartment rents ranged from €220 (US$266) to €235 (US$284) per month.
  • In Liepāja, a port city on Latvia’s west coast known for its long Liepāja Beach, the average monthly rent for apartments ranged from €185 (US$223) to €220 (US$266).
  • In Valmiera, the largest city of the historical Vidzeme region, rents ranged from €215 (US$260) to €235 (US$284).
  • In Cēsis, a northeastern town known for its medieval castle, the average monthly rent stood at €205 (US$248) in 2020.
  • In Bauska, a town located in the Zemgale region of southern Latvia, apartment rents in serial projects averaged €180 (US$217) per month.
  • In Ventspils, a port city on the Baltic Sea, the average rent for apartments in serial projects was €165 (US$199) per month last year.
  • Rēzekne, situated on the eastern part of Latvia, has one of the lowest rents in the country, at just €125 (US$151) per month last year.

Pandemic hits Latvia’s economy, finances

Latvia’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.

Latvia gdp inflation

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 Edvards Kusners of the Bank of Latvia Council.

Latvia unemployment

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.


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