Latvia’s housing market remains robust
December 29, 2017
Residential property prices in Latvia continue to rise strongly, amidst limited supply as well as stronger economic growth. According to Arco Real Estate´s figures, apartment prices in Riga surged by 9.03% (5.99% in real terms) to €761 (US$907) per sq. m. during the year to October 2017, up from a y-o-y rise of 7.22% during the same period last year.
Real estate agent OberHaus shows more muted growth, with the average apartment prices in Riga rising by 4.78% y-o-y in October 2017 to €1,205 (US$1,435) per square metre (sq. m.), a sharp slowdown from last year´s 9% growth, according to real estate agent OberHaus. When adjusted for inflation, apartment prices rose by just 1.87% over the same period.
OberHaus tends to deal in high-end city-centre housing, while Arco deals in the estates.
Outside Riga, apartment prices are also rising rapidly.
- In Ogre, one of Latvia´s greenest towns due to its amazing parks and forests, the average apartment price increased 14.3% during the year to October 2017 to €543 (US$647) per sq. m.
- In Kauguri, a popular residential area in the western part of Jurmala, the average apartment price rose by 11.1% y-o-y in October 2017, to €522 (US$622) per sq. m.
- In Salaspils, mostly known for its military history, the average apartment price rose by 16.1% y-o-y in October 2017, to €606 (US$722) per sq. m.
- In Jelgava, a hospitable city located on the banks of the River Lielupe, the average apartment price surged 18.9% during the year to October 2017 to €471 (US$561) per sq. m.
In the third quarter of 2017, the Lavian economy grew by 5.8% from the same period last year, the strongest growth in the Baltics in Q3 and the fastest pace since Q1 2012, according to the Central Statistical Bureau of Latvia (CSB). The economy is projected to grow by 4.5% this year, from annual expansions of 1.9% in 2016, 2.7% in 2015, 2.1% in 2014, 2.6% in 2013, and 4% in 2012, according to Latvia´s Ministry of Economics.
"The number of apartments offered for sale has gone down, month on month, since April," said BALSTS. "Owners are willing to wait for further price increase."
"Price growth is driven by the protractedly rising demand and the limited supply of good quality apartments in the most demanded neighbourhoods," said Latio.
The neighborhoods in Riga with the highest demand include Purvciems, Kengarags, Imanta, and Plavnieki. Strong demand is also recorded in Ziepniekkalns, Jugla, I??uciems and Vecm?lgr?vis.
Why the strong demand? Partly because foreigners get a five-year residence permit in Latvia if they buy residential real estate, under Immigration Law amendments implemented on July 1, 2010. The conditions were then (according to Baltic Legal):
- The transaction should exceed €142,000 (US$ 169,150) in Riga or Jurmala, or €71,000 (US$ 84,575) 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. With Latvia considered to have one of the lowest house prices in Europe, 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$ 297,798).
- The total cadastral value of the property at the time of acquisition should be at least €80,000 (US$ 95,295).
- Payment of a state budget contribution worth 5% of the real estate´s transaction value.
Latvia´s housing boom and bust
Latvia had one of the world´s biggest housing market crashes after 2007. The crisis began when Latvia´s economy expanded by an average of 8.5% from 2000 to 2007, during which period property prices rose by almost 700%. Inflation rose from 2.5% between 1999 and 2003, to over 10% in 2007. By the second half of 2007, the housing bubble had burst. House prices plummeted.
In 2008, Latvia was able to secure a €7.5 billion (US$ 8 billion) standby loan from a group lead by the European Union (EU) and the International Monetary Fund (IMF), coupled with rigid austerity measures. The bailout prevented total economic collapse. More than €3.3 billion (US$ 3.52 billion) of the funds were used to pay public sector wages and maintain essential services, but nevertheless, austerity was a condition of the bailout.
Nevertheless 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. The country´s fiscal deficit shot up, capital left the country, exports fell, and domestic demand collapsed.
- In 2007, apartment prices dropped by 5.01% (-16.71% in real terms) from a year earlier.
- In 2008, apartment prices plummeted by 30.47% (-37.11% in real terms) y-o-y
- In 2009, property prices plunged by another 42.02% (-41.34% in real terms)
Then in 2010, the housing market started to recover, with house prices rising by 5.05% (2.49% in real terms), and then rising another 5.79% in 2011 (1.65% in real terms). In 2011 Latvia achieved GDP growth of 5.5%, and growth of 5.6% in 2012.
In 2012 house prices increased by only 2.06% (0.48% in real terms), partly due to tighter credit policies. In 2013, house prices rose by 4.15% (4.57% in real terms).
In 2014 house price rises slowed to 2.23% (2.03% in real terms), followed by meagre growth of 0.38% (0.04% in real terms) in 2015. The slowdown in prices was due to the amendments in the residence permit program, implemented in September 2014, which mainly affected new apartments built for foreigner buyers. Surprisingly in 2016, house prices surged 8.14% (5.85% in real terms), amidst strong demand.
Demand remains healthy
In 2016, the number of real estate transactions increased 10.5% from the previous year, according to BALSTS. However during the first five months of 2017, the number of transactions was unchanged from a year earlier, at 3,096 units, according to Latio, while the value of transactions in Riga rose by 8% y-o-y to €166.4 million (US$198.2 million).
Number of transactions (according to Latio):
- Series-type apartments: 1,988 units in Jan-May 2017, up slightly by 0.5% from a year ago
- New apartments: 571 units, down 15% from a year earlier
- City Centre apartments: 537 units, up 18% from a year ago
Value of transactions:
- Series-type apartments: €65.5 million (US$78 million) in Jan-May 2017, up 17% y-o-y
- New apartments: €66.6 million (US$79.3 million), down 7% y-o-y
- City Centre apartments: €34.3 million (US$40.9 million), up 30% y-o-y
Housing supply gradually improving
Dwelling completions are still weak. During the first three quarters of 2017, dwelling completions increased by just 0.4% to 1,641 units from the same period last year, according to the CSB - an improvement from annual declines of 1.9% in 2016 and 14.8% in 2015.
Before independence, more than 10,000 apartments were completed annually. After independence the number of dwelling completions dropped to less than 1,000 units annually between 2000 and 2003.
It was only in 2004 that housing construction began to pick up and completions peaked at 9,319 units in 2007. Owner-occupancy rose dramatically, from 21% in 1990 to 87% in 2006.
However the sudden increase in supply flooded the market, pushing prices down. Units started in 2006 and 2007 are still being completed. According to the Central Statistical Bureau of Latvia (CSB)´s figures, 2,201 units dwellings were completed in 2013 up by 5.5% on the previous year, but 76.4% down on the 2006 peak. In 2014, dwelling completions increased by almost 20% to 2,631 units. But completions still remain far below the peak.
Low interest rates
The ECB key rate remained at its all-time low of zero in November 2017, unchanged since March 2016.
Housing mortgage costs in October 2017, for new loans:
- Floating rate and up to 1 year IRF: 2.4%, down from 2.48% a year earlier
- 1-5 years IRF: 5.42%, down from 5.57% a year earlier
- 5-10 years IRF: 11.31%, down from 13.3% a year earlier
- Over 10 years IRF: 5.86%, down from 6.36% a year earlier
For outstanding loans, in October 2017:
- Housing loans with maturity of up to 1 year: 2.89%, down from 3.59% a year earlier
- Housing loans with maturity over 1 year and up to 5 years: 6.74%, down from 5.66% a year earlier
- Housing loans with maturity over 5 years: 2.17%, down from 2.21% a year ago
Mortgage market continues to shrink, despite an introduction of a state support programme
During the house price boom, the pace of mortgage growth was amazing - housing loans outstanding expanded by almost 90% annually from 2004 to 2006. Total mortgage debt rose from 2.1% of GDP in 2000, to 29.7% of GDP in 2007.
It was not until 2008 that mortgage market growth ground to a halt; since then, the country´s share of total mortgage debt to GDP has shrunk from 36.6% in 2010 to 17.6% of GDP in 2016.
Even today, the value of outstanding housing loans continues to decline as most foreign homebuyers typically prefer to pay in cash.
The decline has continued 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 granted by commercial banks to families with children. From the program´s inception in January 2015 to June 2017, state guarantees already totaled €38.6 million (US$ 46 million), benefitting about 5,700 families.
In October 2017, the total value of housing loans outstanding fell by 1.2% to €4.37 billion (US$5.2 billion) from the same period last year, according to the Bank of Latvia.
Housing loans with a maturity of over 5 years account for 96.4% of all loans in October 2017. Loans with maturity of up to 1 year and those with maturity of 1-5 years represented 2.2% and 1.4%, respectively.
Rental yields are moderate
Recent research conducted by the Global Property Guide showed that apartments located in Riga city can earn yields ranging from 3.8% to 5.7%. Bigger apartments of around 120 sq. m. have lower yields as compared to smaller units.
In 2009 the number of potential tenants contracted due to the economic recession, causing rents to plunge by 40%.
The rental market bounced back in 2010 with average rents growing by 20%, due to growing demand brought by Latvia´s improving economy. In 2011 there was a 15% average rent increase, and in 2012 a 10% to 15% increase. In 2013, average rents were up by 10% to 15%, followed by a 5% to 10% rise of average rents in 2014. In 2015, average rents went up by around 5%, according to Ober Haus. Surprisingly in 2016, rents for upper-class apartments in downtown Riga dropped 15% to 20%, due to declining demand for rental apartments, according to real estate firm Latio.
The highest apartment rents can be found in the Old Town. Rents for two-room apartments range from €600 (US$715) to €1,000 (US$1,191) per month, while three-room apartments can be rented from €1,000 (US$1,191) to €2,500 (US$2,978) per month.
In the suburbs, monthly rents for one-room apartments range from €250 (US$298) to €300 (US$357). Two-room apartments have monthly rents ranging from €300 (US$357) to €600 (US$715).
Strong economic growth
On January 1, 2014, Latvia adopted the euro. Its adoption is a recognition of economic success, especially in taming inflation and limiting the budget deficit, estimated at 1.2% both in 2014 and 2015 before achieving a balanced budget in 2016, according to the European Commission. The deficit is expected at around 0.9% this year and at 1% in 2018.
In the third quarter of 2017, the economy grew by 5.8% from the same period last year, the strongest growth in the Baltics in Q3 and the fastest pace since Q1 2012, according to the Central Statistical Bureau of Latvia (CSB). The strong growth was fuelled by favourable external factors, such as robust growth in other EU member states and availability of EU funds, and a fast inflow of investment in the construction sector.
The economy is projected to grow by 4.5% this year, from annual expansions of 1.9% in 2016, 2.7% in 2015, 2.1% in 2014, 2.6% in 2013, and 4% in 2012, according to Latvia´s Ministry of Economics.
Latvia´s public debt was projected to fall to 39.1% of GDP in 2017, down from 40.6% in 2016, according to the European Commission.
In Q3 2017, nationwide unemployment stood at 8.5%, down from 9.5% a year earlier, according to the CSB. The country´s jobless rate averaged 17.1% from 2009 to 2012 and 10.6% from 2013 to 2016.
Overall inflation was 2.7% in November 2017, slightly down from 2.8% the previous month but up from just 1.3% a year earlier, according to the CSB. In 2016, overall inflation stood at just 0.1%, from 0.2% in 2015, 0.7% in 2014, 0.01% in 2013, 2.3% in 2012, and 4.2% in 2011, according to the International Monetary Fund (IMF).
Latvia is now part of the "rich nations club" OECD
Latvia has officially become the 35th member of the prestigious OECD in July 2016. "To a certain extent, it (Latvia´s accession to the OECD) is a matter of prestige. Some of the key questions asked by investors are about whether it is geopolitically safe here, whether we have reduced corruption, and the OECD membership would partly be an answer to the investors that we are a trustworthy country, not some kind of a banana republic," said Finance Minister Dana Reizniece-Ozola.
"The accession process has already brought significant benefits and improvements for Latvia: it has been the driving force behind reforming the governance of state-owned capital enterprises and has also served as an additional incentive to enhance our capacity in countering bribery in international business transactions," Prime Minister M?ris Ku?inskis said.
In February 2016 PM Ku?inskis took office after former PM Laimdota Straujuma resigned in December 2015, due to the infighting within the ruling coalition. PM Ku?inskis is a member of the Union of Greens and Farmers, and Latvia´s first prime minister not to be a member of the Unity Party since 2009.
Aside from PM Ku?inskis, Latvia also elected Raimonds V?jonis as state president in June 2015. State President V?jonis is a member of the Green Party, which is a part of the Union of Greens and Farmers.
Relations with Russia improving
In November 2017, Russia and Latvia signed an agreement 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.
"While observing regulations of the EU, we will ensure more favourable conditions for the border residents. The agreement refers to those who live in about 30-kilometer distance from the border," said Andrejs Pildegovics, Latvia´s State Secretary of the Ministry of Foreign Affairs.
"Such cooperation is important for the border region. About 50-60 such permits are issued a year," added Pildegovics.
Pildegovics also noted that an agreement between the Latvian and Russian ministries was signed to provide for closer cooperation in the coming two years in such areas as security, cooperation in international organizations, and the Baltic Sea region, among others.
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.