Latvia's housing market robust
Lalaine C. Delmendo | February 09, 2022
In Riga, Latvia's capital city, apartment prices rose by 17.9% to €967 (US$1,017) per square metre (sq. m.) in April 2022 from a year earlier, according to Arco Real Estate's figures, a sharp improvement from the previous year's meager growth of 0.24%. In fact, it was the biggest y-o-y increase recorded in a decade.
However when adjusted for inflation, apartment prices actually increased by a modest 4.37% y-o-y in April 2022. The huge difference between the nominal and real figures is due to high inflation, amidst supply chain disruptions caused by the Covid-19 pandemic as well as the ongoing Ukraine crisis.
In May 2022, nationwide inflation in Latvia reached 16.9%, the highest in about 13 years.
Real estate agent Ober Haus, which tends to deal in high-end city-centre housing, says average apartment prices in Riga rose, on average, by 11% during 2021, following a 0.9% decline in 2020.
- For existing apartments, prices ranged from €700 to €1,500 per sq. m.
- For new apartments, particularly in Riga city centre and in the Old Town, prices stood at about €1,800 to €4,700 per sq. m. Apartment prices in luxury projects can reach as much as €7,000 per sq. m.
“In 2021, the housing sector in Latvia, despite the fact that the Covid-19 pandemic had not yet receded, showed growth practically in all segments,” said Ober Haus. “The main drivers of the market— availability, financing and positive attitudes towards the market—remain high. As the demand for housing increased, so did their prices. Demand increased not only for new projects, but also in the secondary market.”
In Riga, apartment sales rose by 20% in 2021 from a year earlier, following a 9.5% decline in 2020, according to Ober Haus, as both local and foreign demand increased again amidst the easing of travel restrictions and other curbs. Nationwide, apartment sales transactions increased 16% y-o-y to 21,288 units in 2021, according to figures from Latio.
Despite increasing demand, residential construction activity remains weak. During 2021, the number of new dwellings authorized in Latvia fell by 6.5% to 2,853 units, according to the Central Statistical Bureau. Likewise, the area of new dwellings authorized also dropped 14.7% to 353,700 sq. m. over the same period. Then in Q1 2022, both the number and area of new dwellings commissioned fell further by 20.8% and 8% y-o-y, respectively.
Overall economic outlook is now uncertain amidst heightened risks caused by the ongoing Russia's invasion of Ukraine. The European Commission (EC) repeatedly downgraded Latvia's GDP growth forecast for this year – from an initial growth forecast of 5% to 4.4% and now to a much slower pace of just 2%. Likewise, the Bank of Latvia has also recently revised down its 2022 growth forecast to 1.8%, far lower than its previous estimate of a 4.2% expansion.
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.
Latvia’s economy to slow, inflation surgingLatvia’s economy expanded by 4.5% in 2021, recovering from the 3.8% contraction it suffered in 2020 due to pandemic-related restrictions and lockdowns.
However, the outlook is now uncertain amidst heightened risks caused by the ongoing Russia’s invasion of Ukraine, with the European Commission (EC) repeatedly downgrading Latvia’s GDP growth forecast for this year. From a growth forecast of 5%, the EC reduced it to 4.4% and now to a much slower pace of just 2%. Likewise, the Bank of Latvia has also recently revised down its 2022 growth forecast to 1.8%, far lower than its previous estimate of a 4.2% expansion.
“The Latvian economy will continue to grow, thanks to investments, services exports, and consumption,” said Valdis Dombrovskis, the Executive Vice-President of the European Commission. “However, given the negative economic impact of Russian aggression against Ukraine and related sanctions, Latvia's GDP growth will slow down significantly. This impact will be felt both as exports decline and as energy and raw material prices rise.”
The country recorded a budget deficit of 7.3% of GDP in 2021, sharply up from shortfalls of 4.5% in 2020, 0.6% in 2019 and 0.8% in 2018, according to Eurostat. In fact, it was the biggest deficit since 2010.
The EC expects Latvia’s deficit to remain high at 7.2% of GDP this year before falling to 3% in 2023.
Latvia’s public debt reached 44.8% of GDP in 2021, up from 43.3% in 2020 and 36.7% in 2019. It was the biggest debt since 2009. The public debt is expected to increase further to about 47% of GDP this year, according to the European Commission.
In Q1 2022, nationwide unemployment stood at 7.3%, up from 7.1% in the previous quarter but down from 7.5% a year earlier, according to the Central Statistical Bureau of Latvia. This is still much lower than the country’s jobless rate from 2009 to 2012, which averaged 17.1%, falling to 8.9% from 2013 to 2021.
Inflation accelerated to 16.9% in May 2022, an acceleration from 2.6% in May 2021 and -0.6% two years ago. It was the highest level since June 2008.
On January 1, 2014, Latvia adopted the euro. Then in July 2016, the country officially became the 35th member of the prestigious OECD.