Lithuania’s housing market is cooling rapidly

Lithuania’s housing market is noticeably slowing, as high inflation, rising interest rates, and a weakening economy are pushing homebuyers to the sidelines.

The five major cities’ apartment price index (covering Vilnius, Kaunas, Klaipėda, Šiauliai, and Panevėžys) rose by 9.08% during the year to Q2 2023, according to Ober Haus Real Estate Advisors. It was the first time in 26 months that y-o-y price growth fell to single-digit. In fact, in real terms, apartment prices were actually unchanged over the same period.

Stubbornly high inflation is the culprit for the huge difference between the nominal and real figures. In July 2023, nationwide inflation slowed to 7.4%, the lowest reading since September 2021 but remains far above the average 1.9% seen from 2012 to 2021. Inflation started to accelerate last year, reaching a 25-year-high of 18.9%.

On a quarterly basis, apartment prices rose slightly by 0.35% (0.58% inflation-adjusted) in Q2 2023.

All Lithuanian major cities continued to register nominal house price rises during the year to Q2 2023. But when adjusted for inflation, prices were more or less stable or dropped modestly.

  • In Vilnius average apartment prices rose by 10.49% y-o-y in Q2 2023, to €2,550 per square meter (sqm). When adjusted for inflation, prices in the capital city increased by a meager 1.32% over the same period.
  • In Kaunas, apartment prices were up by 8.57%, to an average of €1,723 per sqm in Q2 2023 from a year earlier, but actually declined slightly by 0.43%.
  • In Klaipėda, the average apartment price rose by 7.16% y-o-y to €1,602 per sqm in Q2 2023. In real terms, prices fell by 1.73% over the same period.
  • In Šiauliai, apartment prices rose by a modest 4.66% to an average of €1,078 per sqm but dropped 4.02% when adjusted for inflation.
  • In Panevėžys, prices of existing flats were up moderately by 4.55% y-o-y, to an average of €1,058 per sqm in Q2 2023. Yet prices were down by 4.12% in real terms.

Lithuania´s Major Cities House Price Indices graph

Demand is falling sharply. In 2022, the total number of housing transactions in Lithuania dropped 14% in 2022 from a year earlier, in contrast to a 21% surge in 2021. In Vilnius,  apartment sales fell by 17% while house sales declined 25% last year, according to figures from the State Enterprise Centre of Registers.

The weakness of the housing market continued this year, with sales of older apartments in the whole country falling by another 18% in June 2023 from a year earlier. Almost all major cities saw double-digit y-o-y declines in home sales in June 2023.

“The housing market remains sluggish and shows no signs of recovery. Activity indicators remain in negative territory, with significantly fewer home purchases than a year ago,” said Ober Haus.

Foreign demand is also weak, despite virtually no restrictions on foreign ownership of land in Lithuania, except for agricultural lands.

Yet residential construction activity indicators showed mixed results. In Q1 2023, dwelling permits fell by 28.6% y-o-y to 3,040 units while completions increased by 21.5% to 3,870 units, based on figures from Statistics Lithuania.

Almost all Lithuanian dwelling stock is in private ownership (98%).

Lithuania’s economy remains weak, registering y-o-y real GDP contractions of 0.4% in Q4 2022 and 2.5% in Q1 2023, and a minuscule growth of 0.6% in Q2 2023. The economic slowdown started last year, with the economy growing by just 1.9% for the full year of 2022, a sharp deceleration from the prior year’s 6% expansion.

For 2023, economic activity remains subdued, amidst continued economic and geopolitical uncertainty. Lithuania’s economy is projected to expand by a meager o.5% this year before improving to a 2.7% growth in 2024, based on EC forecasts. The International Monetary Fund (IMF) released a gloomier projection for Lithuania, with the economy contracting by 0.3% this year, as high inflation weighs on private consumption.

Lithuania joined the eurozone on January 1, 2015.

That crazy housing boom and bust

Before the global financial crisis of 2008-09, Lithuania saw enormous house price increases. The average price of old apartments in Central Vilnius rose 275% between 2002 and 2006. This included a house price surge of 28% in 2003, 29% in 2004, 45% in 2005, and 56% in 2006.

Lithuania’s house price annual change

Residential property prices in the capital started to decline in 2008, after the global credit crunch. House prices plunged by 15.2% (-21.9% inflation-adjusted) in 2008 and by another 26.8% (-27.8% inflation-adjusted) in 2009. Then the housing market showed some signs of improvement, with prices falling by just an average of 1.8% (4.9% inflation-adjusted) annually from 2010 to 2012.

In 2013, the property market finally recovered and house prices have been rising modestly since then. From 2014 to 2019, house prices increased by 24.5% (12.7% inflation-adjusted).

In 2020, house prices still managed to increase by a modest 4.06% (3.81% inflation-adjusted), despite the adverse impact of the Covid-19 pandemic. House price growth accelerated in the succeeding years, as economic activity slowly returns to pre-pandemic level. House prices surged by 22.39% (10.7% inflation-adjusted) in 2021 and by another 19.1% (-2.17% inflation-adjusted) in 2022.

HOUSE PRICE INDEX, 5 LARGEST CITIES
Year Nominal Inflation-adjusted
2008 -15.23 -21.85
2009 -26.84 -27.77
2010 -2.98 -6.55
2011 -0.64 -3.91
2012 -1.65 -4.36
2013 1.12 0.76
2014 3.34 3.61
2015 2.29 2.38
2016 5.50 3.72
2017 3.57 -0.33
2018 3.94 2.01
2019 7.18 4.34
2020 4.06 3.81
2021 22.39 10.70
2022 19.10 -2.17
Sources: Ober Haus, Global Property Guide

Demand is now falling

Nationwide, the total number of housing transactions dropped 14% in 2022 from a year earlier, in contrast to a 21% surge in 2021. During 2022, Vilnius recorded a 17% decline in apartment sales and a 25% fall in house sales. Only about 970 apartments and 90 houses, on average, were sold in the capital city every month.

“The demand for residential property, during 2022 was totally different in the Lithuanian market when compared to 2021. After the start of the war in Ukraine at the beginning of 2022, the mood of the market participants changed dramatically and the record activity of 2021 was replaced by a decline in the entire housing market, returning the country’s housing market to the activity levels of 2019,” said Ober Haus.

The weakness of the housing market continued this year, with sales of older apartments in Lithuania falling by another 18% in June 2023 from a year earlier.

All major cities registered a dramatic decline in the number of transactions over the same period. Vilnius saw a drop in apartment sales of 22% y-o-y in June 2023; Kaunas, -22%; Panevėžys, -25%; Šiauliai, -29%; and, Klaipėda, -10%.

“It is very likely that home buyers in the country’s most expensive city are not finding it easy to make the purchase at the moment due to the record high prices and rising interest rates,” said Raimondas Reginis of Ober Haus.

Lithuania Residential Property Transaction graph

Residential construction activity mixed

Residential construction activity showed mixed results during 2022. 

For permits, the total number of dwellings authorized fell by 18% to 15,807 units in 2022 from a year earlier, in contrast to a y-o-y increase of 28.6% in 2021, according to figures from Statistics Lithuania.

  • For one and two-dwelling buildings, the number of dwellings for which building permits were granted plunged 30.9% in 2022 to 9,835 units, following a huge 42.6% increase in 2021.
  • For three and more dwelling buildings, permits rose by 18% y-o-y to 5,972 units, after increasing by a meager 0.7% in the prior year.

 Dwelling completions soared 46.7% y-o-y to 15,888 units in 2022, after declining by 22% in 2021.

  • For one and two-dwelling buildings, completions were up by 29.9% y-o-y to 9,562 units last year, following a modest decline of 3.2% in 2021.
  • For three and more dwelling buildings, completions surged 82.5% to 6,326 units in 2022, in stark contrast to a y-o-y fall of 44.8% in the prior year.

Then in Q1 2023, dwelling permits fell by 28.6% y-o-y to 3,040 units while completions increased by 21.5% to 3,870 units.

During the 1980s, when the country was still socialist, more than 20,000 dwelling units were built annually.

Completions dropped to less than 5,000 annually between 1998 and 2003, leaving a huge, pent-up demand.

As the economy gathered steam, housing construction accelerated:

  • In 2004-2006 dwellings completions rose to an average of 6,700 yearly
  • In 2007, there were 9,286 completed dwellings
  • In 2008 dwelling completions rose to 11,286, the highest since 1992

 Then suddenly things stalled. Completions averaged just 5,500 units annually from 2010 to 2014.

Construction activity started to recover in 2015. Dwelling completions averaged nearly 12,000 units annually from 2015 to 2021.

Lithuania Residential Construction graph

Interest rates are rising sharply

The average interest rate for new housing loans was up dramatically to 5.58% in June 2023, from 2.17% in June 2022 and 2.21% two years ago, according to the Bank of Lithuania.

For new loans, by initial rate fixation (IRF):

  • The average interest rate for new housing loans with an IRF of up to 1 year stood at 5.56% in June 2023, sharply up from 2.08% a year earlier and 2.12% two years ago.
  • The average rate for new housing loans with IRF of more than 1 year was 6.14% in June 2023, up from 3.53% in the previous year and 5.06% two years ago.

 For outstanding loans, the average interest rate was 5.31% in June 2023, far higher than the 2.04% recorded in June 2022 and 1.91% two years earlier.

For outstanding housing loans, by maturity:

  • Up to 1-year maturity: 5.58%, up from 3.59% in the previous year and 2.41% two years ago
  • 1-5 years maturity: 6.48%, up from 5.06% both in June 2022 and June 2021
  • Over 5 years maturity: 5.31%, sharply up from 2.04% a year earlier and 1.91% two years ago

 More than 99% of all housing loans have a maturity of over 5 years. All new loans are now in euros. Lithuania joined the Euro on January 1, 2015, the bloc’s 19th member. The Litas, which had been pegged to the Euro for a decade, went out of circulation.

Lithuania Interest Rate Percentages graph

Mortgage loans continue to increase

During 2022, new mortgage loans worth €2.16 billion were drawn, up by almost 9% from a year earlier. New mortgage loans averaging €180 million were provided every month in 2022, about 38% more than the average amount of  €130 million recorded during the period 2019-2021.

“Despite reduced residential market activity, mortgage loan volumes increased and nationally, reached new heights in 2022,” said Ober Haus.

In June 2023, the total housing loans outstanding rose by 9.2% to €11.82 billion from a year earlier, following an increase of 12.1% in 2022 and an annual average growth of 8.8% from 2016 to 2021, based on figures from the Bank of Lithuania. About 99.8% of the loans have a maturity of more than 5 years.

Lithuania Outstanding Housing Loan Year to Year Change graph

Though as a percentage of GDP, the size of the mortgage market fell slightly to 17.1% in 2022, from 18.2% in 2021. The mortgage market grew to about 22.4% of GDP before the 2009 global financial crisis, sharply up from a mere 0.4% of GDP in 2000 but remains one of the lowest in the European Union.

“As nominal Lithuanian GDP increased by 19.5% and the value of total outstanding housing loans increased by 12.7%, the debt to GDP ratio decreased by 1.1 percentage point to 17.1%. This rate is one of the lowest in the EU (EU-27 average in 2021 – 45.0%),” noted the Ober Haus.

About 80% of all dwelling purchases are now made with the aid of mortgages, and typically 95% of all property value is granted in loans.

Lithuania Housing Loans graph

Rental yields are moderately good; rents are rising strongly

In Vilnius, gross rental yields - the average return on investment - on apartments both in the city center and in the suburbs averaged around 6.03%, according to research conducted by the Global Property Guide in November 2022. These are good yields. For the very smallest apartments, yields would be even higher, up to 8.41%.

Figures from Ober Haus’ 2023 Real Estate Market Report for Baltic States Capitals are more conservative, with the average residential yields at the Vilnius city center estimated at about 4.5% in 2022. Though it is slightly higher than 4.2% in 2021 and 4.4% in 2020.

Rents continue to rise strongly, buoyed by increased demand from people and companies fleeing from Ukraine, Belarus, and Russia. During 2022, apartment rents in Vilnius soared by 26.7%, following a 9.5% increase in 2021, according to Ober Haus.

“As a result of the war started by Russia, people and companies fleeing from Ukraine, Belarus, and Russia, created additional tension in the Lithuanian real estate market and significantly destabilized this sector,” said Ober Haus. “During Q2 and Q3 of 2022, the rents of apartments in Vilnius jumped by 30%.”

During 2022:

  • A typical two-bedroom, existing apartment in Vilnius residential districts rents for €360 to €520 per month, up from €320 to €400 in 2021. A same-size new apartment rents for €500 to €680 per month, sharply up from a range of €400 to €530 in the previous year, based on figures from the Ober Haus.
  • An equipped two-bedroom apartment, either old or new, located in the city center and surrounding areas is offered for a monthly rent of €450 to €950, up from €400 to €750 in 2021. For three-bedroom apartments, monthly rents ranged from €620 to €1,600 in 2022, up from €530 to €1,100 in the previous year. Rents for bigger and well-equipped apartments in the Old Town can cost €1,800 to €3,000 per month, far higher than the prior year’s €1,300 to €1,500 range.
  • Fully-equipped houses, measuring between 100 to 200 sq. m., situated on the outskirts of Vilnius, are rented out for €900 to €2,000 per month last year, up from €750 to €1,500 per month in 2021.
  • In the city center and the prestigious districts of Valakampiai, Antakalnis, and Zverynas, monthly rents are much higher and can vary from €1,500 to €4,000 in 2022, up from €1,200 to €3,500 a year earlier. Rents for bigger houses in the best locations can go as high as €5,000 to €6,000 monthly.

 Ober Haus expects the rental market to remain tight this year, amidst continued strong demand both from locals and foreigners. Rents are projected to continue rising, albeit at a much slower pace, as the market gradually stabilizes.

“Since home buyers are much more cautious about purchasing a home, renting a home remains an affordable housing alternative. Therefore, the outlook for the housing rental sector in 2023 remains positive, especially considering that Vilnius continues to be a rapidly growing city (in 2022 its population increased by around 5%),” noted Ober Haus.

“Ober-Haus expects that overall, residential rents in Vilnius will increase slightly in 2023.”

Sharp economic slowdown

Lithuania’s economy remains weak, registering y-o-y real GDP contractions of 0.4% in Q4 2022 and 2.5% in Q1 2023, and a minuscule growth of 0.6% in Q2 2023. The economic slowdown started last year, with the economy growing by 1.9% for the full year of 2022, a sharp deceleration from the prior year’s 6% expansion. 

“Following Russia’s full-scale invasion of Ukraine, economic activity was dampened by contracting private consumption over the last three quarters of 2022, driven by a drop in consumer confidence and household disposable income,” said the European Commission (EC).

“Large supply chain disruptions drove input prices upwards and hindered the performance and competitiveness of industries in some sectors, putting a drag on investment. As a result, economic growth turned negative in the fourth quarter (-0.5%) and annual growth slowed down to 1.9% in 2022,” the EC added.

For 2023, economic activity remains subdued, amidst continued economic and geopolitical uncertainty. Lithuania’s economy is projected to expand by a meager o.5% this year before improving to a 2.7% growth in 2024, based on EC forecasts. The International Monetary Fund (IMF) released a gloomier projection for Lithuania, with the economy contracting by 0.3% this year, as high inflation weighs on private consumption.

“Inflation increased to an average of 19 percent in 2022—one of the highest in the eurozone—with elevated core inflation reflecting broad-based inflationary pressures. High inflation and rising interest rates weakened disposable income which, combined with weak external demand, eventually resulted in a contraction of economic activity at the end of last year that intensified at the beginning of this year,” the IMF noted.

Lithuania GDP Growth and Inflation graph

The financial crisis of 2008-9 brought to an end years of amazing average growth of 8.2% from 2001 to 2007. The economy slowed in 2008 and shrank by almost 15% in 2009.

In 2010 the economy finally emerged from recession, with a GDP growth of 1.6%. Then in 2011, the Lithuanian economy began to expand strongly, with real GDP growth of 6.1%, the second fastest pace in the EU. The economy expanded by an average of 3.6% annually from 2012 to 2014. However in 2015, economic growth slowed to 2%, the slowest growth since 2010, due to sluggish investment and a decline in exports to Russia, the country’s largest single trading partner.

The Lithuanian economy strengthened again in recent years, growing by an annual average of 4.2% in 2017-19, before the coronavirus. However, in 2020, the country suffered a slight contraction due to pandemic-related travel restrictions and lockdowns.

Inflationary pressures continue to ease. In July 2023, nationwide inflation slowed to 7.4%, the lowest reading since September 2021, as housing costs dropped and price increases for food and non-alcoholic beverages slowed. Inflation is expected to average 9.2% this year, a sharp slowdown from 2022’s 18.9%, according to the European Commission.

In 2022, Lithuania’s budget deficit fell to 0.6% of GDP, down from shortfalls of 1.2% of GDP in 2021 and 6.5% of GDP in 2020, according to Eurostat, mainly due to lower-than-expected expenditure on energy support measures and intermediate consumption. The country is expected to post deficits equivalent to 1.7% of GDP this year and 1.4% of GDP in 2024, based on EC estimates.

Lithuania General Government Balance graph

As a result, the country’s gross public debt declined to around 38.4% of GDP in 2022, down from 43.7% in 2021, and 46.3% in 2020. Debt is expected to fall further to 37.1% of GDP in 2023 and to 36.6% of GDP in 2024.

The labor market has returned to its pre-pandemic levels. In Q2 2023, the nationwide unemployment rate fell to 5.9%, down from 7.7% in the previous quarter but up from 5.2% a year earlier, according to Statistics Lithuania. The country’s jobless rate averaged more than 13% from 2009 to 2015 before falling to about 7% from 2016 to 2022.

Lithuania Unemployment Rate graph

Sources:

·         Lithuanian Economic and RE Market Report 2021-2022 (In Real): https://www.inreal.lt/file/2/1/5/8/2021-2022_Lithuanian-Economic-and-Real-Estate-Market-Report_INREAL-Siauliu-bankas-COBALT-Citynow_compressed%20%281%29.pdf