Prices in Estonia falling fast

Prices in Estonia falling fast

Prices in Estonia have begun falling. Prices of Tallinn 2-room apartments fell 5.47% in the first quarter of the year, according to national statistics, and have surely fallen further since then – common estimates are by at least 10%.

Estonia tends to be the leader in the Baltics. What happens here is followed elsewhere. No surprise, then, that prices in Latvia have also begun falling.

Prices of 2-room apartments in Tallinn rose by 28.64% in 2006, and 56.69% in 2005.

The end of Estonia’s boom

Estonia’s housing market has been in almost continuous boom since the year 2000. The growth in prices has been due to several factors, mainly historic low interest rates and inflation, persistent economic growth of more than five percent per annum, and rapid acceleration of wages.

A slowdown was felt in 1999 due to contagion from the Asian and Russian crisis. This led to a contraction in the economy slight increase in interest rate and inflation. After 2000 the country recovered and the present house price boom began.

Supply has considerably increased from 720 new apartments per year in 2000 to 5,068 new apartments in 2006. Until recently, this has not been enough to keep pace with demand. Most apartments are sold before completion.

Developers are targeting suburban sites for middle class Estonians living in Soviet-era block buildings.

One reason for the sudden drop in demand may have been the rising price of mortgages. The interest rate on EEK-denominated mortgages has risen from 3.65% in March 2005, to 5.13% in June 2007. Interest rates on Euro-denominated mortgages have risen even more, from 3.17% in October 2005, to 5.27% in June 2007.

The mortgage market is small but rapidly growing. The ratio of mortgage loans to GDP, at 23% as of Q3 2005, is still considerably lower than the EU’s average, at 48%. Currently the maximum lending period is 30 years and loans may be granted for up to 100% of the property value. The low mortgage rate coupled with wages expected to grow by 7-10% for the next few years. About 70% of Estonians live in flats or apartment blocks.

Modest rental growth and yields

New apartments exert some pressure on owners of old apartments to lower their rental price. Hence, rents have been growing only modestly. But forecasts of a 10% - 15% rental drop made in 2004 by Oberhaus have already proven unfounded.

However the relatively stagnant rents combined with (till recently) rocketing prices is lowering rental yields. The 20% yields of the beginning of the decade are now down to 6%. As prices come down, rents are likely to continue rising, returning yields to reasonable levels.

The first sector to benefit from the EU-induced immigration is the Old Town. Tallinn is an attractive city of 410,000 inhabitants, with a striking 14th and 15th century old town. With extremely limited supply, very unique apartments that are well renovated and with a good view commands the highest price. These are very suitable for diplomatic missions and embassies, and they are more willing to pay the above average price.

The number of expatriates doing business in Estonia is expected to increase. There are already a lot of diplomats and representatives of various enterprises arriving.

The current price of €2,200-€2,500 per square meter for a new or refurbished apartment in central Tallinn is now becoming comparable to prices in Estonia’s wealthy neighbors, though still somewhat lower.