Lithuania’s stagnant housing market

After enormous increases from 2003 to 2006, Lithuania’s residential property prices peaked in early 2007. Since then, prices have been stagnant, though adjusted for inflation prices are down by 10% from their peak.

In Q1 2008, the average price of newly constructed 1-room apartments in Central Vilnius was LTL12,500 (€3,620) per sq. m., according to Invalda Real Estate (Inreal), unchanged since Q2 2007.

The average price of old 1-room apartments in central Vilnius has also been unchanged since Q2 2007, after plunging 25% from LTL 12,000 (€3,475) to LTL9,000 (€2,607) per sq. m.

Prices of other dwellings in Vilnius have likewise been frozen since Q2 2007.

An economic slowdown due to tighter credit conditions and anti-inflationary measures, has led to housing market stagnation.

Massive house price increases

A massive house price boom in Latvia occurred between 2003 and 2006. The average price of old apartments in Central Vilnius skyrocketed, with a 28% increase y-o-y in 2003, 29% in 2004, 45% in 2005 and a 56% rise in 2006. Average prices rose from LTL3,200 (€927) in 2002 to LTL12,000 (€3,475) at end-2006, a massive 275% increase.

The average price of newly constructed one bedroom apartments in central Vilnius rose 162% from 2002 to end-2006.

Massive house price increases were also seen in other major cities in Lithuania. In Kaunas, the second largest city, the average price of old 1-room apartments rose 32% in 2005 and 49% in 2006.

In Klaipeda, Lithuania’s third largest city and only seaport, the average price of one room apartments rose 282% from LTL2,200 (€637) per sq. m. in 2003 to LTL9,000 (€2,607) per sq. m. at end-2007.

As a response to the increase in demand, the pace of housing construction has accelerated. Between 1998 and 2003, less than 5,000 dwellings were completed annually. Completions rose to 6,700 yearly from 2004 to 2006. In 2007, 9,286 dwellings were completed.

Economy, mortgage market

Lithuania became one of Europe’s fastest growing economies after an economic recession in 1999. Average annual GDP growth from 2000 to 2006 was 7.3%, including an impressive 10.3% economic expansion in 2003. After growing by more than 7% from 2004 to 2006, GDP growth reached 8.8% in 2007.

GDP per capita rose to around US$11,350 in 2007, rising 77% in real terms from its level in 2000. Unemployment dropped from 17.4% in 2000 to 4.3% in 2007. Real wages rose 8% in 2005, 13% in 2006 and 15% in 2007.

Developments in the mortgage market added fuel to the house price boom. Although relatively small, the mortgage market has rapidly expanded. Mortgage debt rose from a mere 1.1% of GDP in 2000 to 12.6% in 2006.

Outstanding loans to households for house purchase rose from LTL3,448 (€999) million in 2004 to LTL16,744 (€4,849) million at end-2007. About 80% of all purchases are done with the aid of mortgage loans, and credit may be granted for up to 95% of property value.

Rising inflation

Rapid economic growth combined with rising food and fuel prices has spurred inflation. Annual inflation has been accelerating since 2004, reaching 8.2% in 2007, the highest level in a decade. From 1999 to 2003, prices barely increased, with average annual inflation of only 0.38%.

The level of inflation is well above the Maastricht Treaty’s criteria for countries applying to adopt the euro.

Similar to other countries with currencies pegged to the euro, Lithuania has surrendered its ability to raise interest rates to control inflation. To be able to maintain the peg, interest rate movements set by the European Central Bank are mirrored in Lithuania.

The government has no option but to spend less to cool down the economy to bring down inflation. In November 2007, the government passed the Fiscal Discipline Law. Starting 2008, the annual fiscal deficit cannot exceed 0.5% of GDP. The budget deficit in 2007 was 1.3% of GDP.

An economic slowdown was immediately felt in the first quarter of 2008. GDP growth fell to 6.9% y-o-y, lower than the 8.0% increase in Q4 2007, and the 8.1% rise in Q1 2007. Full year GDP growth for 2008 is expected to be around 5.5% to 6%.

Despite the slowdown controlling inflation is will remain difficult due to internationally high fuel, commodity and food prices. Inflation is expected to exceed 10% in 2008.