Estonia's house prices continue to increase, despite falling property demand and struggling economy.

Table of Contents

• Housing Market Snapshot
• Demand Highlights
• Supply Highlights
• Historic Perspective
• Rental Market
• Mortgage Market
• Socio-Economic Context

Housing Market Snapshot

During the year to Q1 2024, the nationwide dwelling price index rose by 7.81%, following year-on-year increases of 5.74% in Q4 2023, 3.84% in Q3, 4.98% in Q2, and 9.16% in Q1, according to figures released by Statistics Estonia. When adjusted for inflation, prices increased by a more modest 3.41% over the same period.

Quarter-on-quarter, house prices were up by 1.98% (0.47% inflation-adjusted) in Q1 2024.

Estonia's house price annual change

By property type:

• Apartments: prices rose strongly by 11.05% y-o-y in Q1 2024, an acceleration from annual increases of 6.86% in Q4 2023, 2.94% in Q3, 5.67% in Q2, and 6.83% in Q1, according to Statistics Estonia. When adjusted for inflation, apartment prices were up by 6,52%. On a quarterly basis, prices increased slightly by 1.17% in Q1 2024 but fell by 0.33% in real terms.
• Houses: prices rose by a meager 1.05% y-o-y in Q1 2024, its weakest showing since Q3 2020. In fact, when adjusted for inflation, house prices actually fell by 3.07% over the same period. Quarter-on-quarter, prices were up by 4.01% (2.46% inflation-adjusted).

In Tallinn, the country's capital, the average price of apartments stood at €3,084 per square meter (sqm), according to Ober Haus. For new apartments, the average price reached €4,205 per sqm while for existing apartments, the average price was €2,797 per sqm.

The highest price levels in the capital city can be found in northern Tallinn and Kristine, where a new two-bedroom apartment is typically offered for an average price of €224,500 and €209,500, respectively.

The continued increase in residential property prices is quite surprising given plummeting demand. During 2023, the total number of purchase-sale contracts of dwellings in Estonia fell sharply by 18.4% y-o-y to 40,642 units, following an annual decline of 18.1% in the prior year, according to the Estonian Land Board. It was the lowest level of sales transactions recorded since 2012. Likewise, the value of contracts plunged by 17.8% to €4.38 billion over the same period.

Then in the first half of 2024, the number and total value of purchase-sale contracts of dwellings fell further by 6.5% and 5%, respectively, as compared to the same period last year.

"I think we'll definitely see some further declines this year. It could well be 10 percent. It depends on how many new apartments are on the market. Fewer and fewer of them are being built, and their share of the market is falling all the time," said real estate expert Risto Vähi.

The outlook for the Estonian housing market in 2023 remains uncertain, as the wider economy continues to struggle.

Estonia's economy contracted by 3% in 2023 from a year earlier, following a 0.5% decline in the prior year, amidst falling private consumption, weak investment, and plummeting exports. Both the European Commission and the International Monetary Fund (IMF) expect the Estonian economy to remain weak in the medium term, projecting another real GDP decline of 0.5% for the whole year of 2024.

"The Estonian economy is expected to remain in recession in 2024 amid weak export prospects and falling investment," said the European Commission.

"In 2024, sentiment indicators of all main business sectors remained weak through April, reflecting a sluggish beginning of the year. Meanwhile, consumer sentiment became less negative. Private consumption is set to benefit from continuous real wage growth and the expected lower interest rates, which would decrease mortgage payments (most of which have variable interest rates in Estonia), freeing funds for consumption and making saving less appealing," added the Commission.

Demand Highlights

Property sales transactions falling rapidly

During 2023, the total number of purchase-sale contracts of dwellings in Estonia fell sharply by 18.4% y-o-y to 40,642 units, following an annual decline of 18.1% in the prior year, according to the Estonian Land Board. It was the lowest level of sales transactions recorded since 2012. Likewise, the value of contracts plunged by 17.8% to €4.38 billion over the same period.

By major city:

• In Tallinn, the number of purchase-sales contracts fell by 14.1% y-o-y to 10,659 units in 2023, following a decline of 14% in 2022 and an increase of 22.2 in 2021. Likewise, the value of contracts dropped 13.1% during 2023 to €1.95 billion, after a 6.8% fall in 2022 and a huge 48.1% growth in 2021.
• In Tartu, the number of purchase-sale contracts was down by 26.2% to 2,380 units in 2023 from a year earlier, following a decline of 4% in 2022 and an increase of 28.6% in 2021. Contracts value also fell by 18.1% y-o-y to €326.46 million, after increasing by 6.1% and 49.5% in the past two years.
• In Parnu, the number of purchase-sale contracts dropped by a huge 22.6% y-o-y to 1,522 units last year, following a 21.6% fall in 2022 and a strong growth of 35.9% in 2021. Likewise, the value of contracts plummeted by 22.3% to €182.89 million in 2023, following annual increases of 6.9% in the prior year and nearly 65% two years ago.

The weakness of the housing market continued this year. In the first half of 2024, the number and total value of purchase-sale contracts of dwellings in the country fell by 6.5% and 5%, respectively, as compared to the same period last year. In contrast, the total area of dwelling contracts increased slightly by 1.5% in H1 2024 from a year ago.

Foreign individuals and companies are allowed to acquire real estate in Estonia with the permission of the local authorities. There are legal restrictions on acquiring agricultural and woodland of 10 hectares or more, and permission from the county governor is needed. Though foreign individuals are not allowed to acquire land located in smaller islands, or listed territories adjacent to the Russian border.

Supply Highlights

Construction activity showed mixed results

Residential construction activity is showing mixed results. During 2023, there were 5,612 dwelling units that were issued building permits, down by 17% from a year earlier, based on figures released by Statistics Estonia. It was the lowest level recorded since 2015.

In contrast, dwelling completions surged by 29.2% y-o-y to 8,424 units in 2023. It was the highest recorded in recent history.

In the first half of 2024, construction indicators continue to show opposing patterns.

For residential building permits:

• The number of dwellings issued building permits rose sharply by 24.4% y-o-y to 2,718 units in H1 2024.
• The floor area of dwellings with permits also increased by 7.6% y-o-y to 254,900 sq. m.
• The average floor area of a dwelling with permits fell by 16.2% y-o-y to 93.8 sq. m.

For dwelling completions:

• The number of dwellings completed in Estonia fell sharply by 31.2% y-o-y to 2,985 units in H1 2024.
• Likewise, the floor area of dwellings completed dropped 26.3% y-o-y to 279,300 sq. m.
• The average floor area of dwellings completed in H1 2024 was 91.8 sq. m., up by 8.4% from a year earlier.

Dwelling stock increasing again

The total housing stock in Estonia has reached 747,000 units in 2023, up by 1.2% from the previous year and by 4% five years ago, according to Statistics Estonia. This was in contrast with the slight decline in dwelling stock of 0.1% y-o-y in 2022.

From 2017 to 2021, the country's dwelling stock had been growing slightly by an annual average of 0.9%.

Historic Perspective

A short history of the Estonian property cycle

After the break-up of the Soviet Union in 1991, housing construction in Estonia dramatically decelerated. In 2001 housing construction began to pick up, and Estonia's housing market was in a continuous boom from 2000 to 2007. The average price of 2-room flats in Tallinn rose by a whopping 448.7% from 2000 to 2007; in Tartu, prices rose 431.5%; and, in Parnu, prices increased by 440%. Price rises of three-room flats were equally impressive, rising 412% in Tallinn, 481% in Tartu, and 471.5% in Parnu.

Owner-occupancy rates rose strongly, up from 85% in 2002, to 96% in 2004. The rental market shrank from 12% of households (with 9% privately renting and 3% in social rents) in 2002, to just 4% in 2004.

Then came the crash, amidst the 2008 global financial crisis. Estonia's house price falls in 2008 was among the biggest in the world, rivaled only by Latvia. House prices plunged by almost 34% in 2009, after falling by 20% in 2008.

Recovery began in 2010, with the average price of dwellings rising by 12.9% (7.3% inflation-adjusted). Dwelling completions began to rise in 2014, growing by 32.6% y-o-y to about 2,756 units. Completions have been increasing since, registering an annual average growth of almost 20% in 2015-20, until the completion slowdown in 2021-22.

Housing market prices have been continuously rising since, with prices rising by an average of about 8% (6.1% inflation-adjusted) annually from 2011 to 2020. Estonia's house price rises accelerated further to 20.4% (10.1% inflation-adjusted) in 2021 and 16.9% (-3% inflation-adjusted) in 2022.

During 2023, house price growth decelerated to 5.8% (1.4 inflation-adjusted), amidst falling demand and a struggling economy.

Rental Market

Moderate rental yields, slowing luxury rental market

Gross rental yields for apartments in Estonia are moderate, ranging from 2.78% to 5.36% in Q2 2024, with a nationwide average of 4.51%, according to a recent research conducted by the Global Property Guide. Yields have declined slightly mainly due to the continued rise in house prices in the country in recent years. They remain however very reasonable at between €152,500 and €323,500 for a two-bedroom apartment.

In major Estonian cities:

• In Tallinn, the country's capital and largest city, gross rental yields for apartments range from 3.87% to 5.07% in Q2 2024, with a city average of 4.46%.
• In Tartu, the country's second-largest city, apartments offer rental yields of between 4.28% and 4.97%, with a city average of 4.7%.
• In Pärnu, a popular holiday resort town in Estonia, yields are not significantly different, ranging from 4.14% to 4.64%, with a city average of 4.39%.

Round-trip transaction costs on residential property in Tallinn (i.e. the costs of buying and selling the property are low.

Due to the country's protracted economic recession, the rental market slowed dramatically in the past two years. Luxury apartments now take longer to be rented out and rent prices are falling gradually. And despite the increased number of war refugees from Ukraine, they are on a tighter budget than the average Estonian.

"That's actually what's happening," said Uus Maa Real Estate analyst Risto Vähi. "Right now, people would rather rent a cheaper apartment with good accessory expenses."

This was supported by other market experts, including Ober Haus. "In 2023, the number of offers continued to increase and rental prices came under pressure. At the end of the year, the rental stock was about 15% higher than at the end of 2022. Due to the continuing economic recession, consumer uncertainty, increased daily expenses, and rising interest rates, rents have started to adjust and decreased by 5-10% since Q3 2023," said Ober Haus in its 2024 Baltics Real Estate Market Report.

Currently, two-bedroom apartments are rented out for about €595 to 919 per month while three-bedroom apartments in prime locations are offered for monthly rents of €1,395 to €1,900.

Mortgage Market

Mortgage interest rates remain high

Interest rates for housing loans in Estonia remain high. In May 2024, the average interest rate on new housing loans was 5.67%, up from 5.38% in the previous year and 2.08% two years ago, according to the European Central Bank (ECB).

Estonia's mortgage loan interest rates:

By initial rate fixation (IRF):

• Floating rate and IRF of up to 1 year: 5.58% in May 2024, up from 5.31% in May 2023 and 1.92% in May 2022
• IRF of 1-5 years: 7.2% in May 2024, up from 5.63% in the previous year and 5.15% two years ago
• IRF of 5-10 years: 8.38%, down from 9.3% in the previous year but still sharply up from 5.85% two years ago
• IRF of over 10 years: 8.9%, sharply up from 5.68% a year earlier and 3.01% two years ago

Likewise, interest rates for outstanding loans are still generally increasing. In May 2024, the average interest rate on outstanding housing loans stood at 5.91%, up from 5.21% in May 2023 and 2.02% in May 2022.

By original maturity:

• Up to 1 year: 6.72% in May 2024, slightly down from 7.08% in the prior year but still far higher than the 2.89% two years earlier
• Over 1 and up to 5 years: 7.96%, up from 7.38% in the previous year and 5.48% two years ago
• Over 5 years: 5.89%, up from 5.19% in May 2023 and 1.98% in May 2022

The sharp increase in housing loan interest rates in Estonia can be attributed to the successive key interest rate hikes implemented by the ECB in the past two years. The key interest rate on main refinancing operations was raised from 0.00% in June 2022 to 4.50% in September 2023 where it remained until May 2024.

Interest rates in Estonia are expected to gradually stabilize in the coming months after the ECB decided to lower its three key interest rates by 25 basis points in June 2024, amidst easing inflationary pressures.

"Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady," said the ECB in its June 2024 monetary policy decision. "Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be decreased to 4.25%, 4.50%, and 3.75% respectively, with effect from 12 June 2024."

Housing loans continue to increase despite high interest rates

Estonia's original house price boom was supported by a massive expansion of the mortgage market which grew by an average of 62% yearly from 2002 to 2006. After 2007, the mortgage market collapsed.

The mortgage market started to recover in 2013 and housing loans have been continuously rising since. Housing loans outstanding rose by an annual average of 6.6% from 2015 to 2021. Then housing loan growth accelerated to 11.3% in 2022 from a year earlier before stabilizing to a 5.9% expansion in 2023.

In June 2024, the total value of housing loans outstanding rose further by 5.9% y-o-y to €11.51 billion, despite rapidly rising interest rates, according to figures from the Bank of Estonia.

However as a percent of GDP, the size of the mortgage market has been more or less steady in the past decade - averaging at about 30.2% of GDP from 2013 to 2023, based on Global Property Guide estimates.

Mortgage loans are typically offered in euros with maturities of up to 30 years.

Socio-Economic Contex

Estonia's economy continues to struggle, unemployment rising fast

Estonia's economy contracted by 3% in 2023 from a year earlier, following a 0.5% decline in the prior year, amidst falling private consumption, weak investment, and plummeting exports.

"Estonia's real GDP contracted by 3% in 2023 in a broad-based manner, revealing a protracted recession," said the European Commission. "Exports fell sharply on account of the low demand from the Nordic countries and other trading partners. Firms operated at low capacity and hence held back on their investment. Private consumption contracted as higher interest rates incentivized savings and households' purchasing power was still recovering from the real wage hit by rapidly rising prices over the last years."

Both the European Commission and the International Monetary Fund (IMF) expect the Estonian economy to remain weak in the medium term, projecting another real GDP decline of 0.5% for the whole year of 2024.

"The economy is caught in a prolonged recession. Against expectations of a rebound in the second half of last year, the contraction in economic activity has extended further, along with stalling productivity and weak external performance. Soft demand from key trading partners and loss of competitiveness has depressed exports, forcing firms to cut back on investment," said the IMF.

From 2000 to 2006, Estonia's economy expanded by an average of 8% annually. Unemployment fell from 14.6% in 2000, to just 4.6% in 2007.

The economy then contracted by a staggering 14.7% in 2009, following a decline of 5.4% in 2008, amidst the global financial crisis. Though it recovered with growth of 7.6% in 2011, on the back of strong exports, economic growth slowed to an annual average of 2.5% from 2012 to 2016, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia.

The following years 2017-19 saw average annual GDP growth of 5%, mainly driven by strong exports, construction, and manufacturing. As a result, unemployment dropped to a record low of 4.4% in 2019.

Then the economy contracted again by 1% in 2020 amidst the Covid-19 pandemic. Over the same period, the nationwide jobless rate increased to 6.8%, due to coronavirus-induced layoffs, according to Statistics Estonia. The jobless rate fell gradually to 6.2% in 2021 and further to 5.6% in 2022. But it increased again to 6.4% in 2023, amidst the country's struggling economy.

The European Commission expects the nationwide unemployment rate to rise further to 7.4% this year, as labor market conditions weaken.

Nationwide inflation eased to 2.5% in June 2024, down from 2.9% in the previous month and 9.2% in the same period last year, according to figures from Statistics Estonia. In fact, it was the lowest reading since April 2021. Inflation averaged just 2.5% from 2011 to 2021, before surging to 19.4% in 2022. Inflation remained high at an average of 9.1% in 2023.

The country's general government deficit increased to about 3.4% of GDP last year, sharply up from a shortfall of just 1% of GDP in 2022.

"Compared with 2022, general government revenues grew by 8.2% and expenditures by 14.5%. Thus, expenditures exceeded revenues by 1.3 billion euros, resulting in a budget deficit that was 3.4% of the GDP in 2023," noted a report released by Statistics Estonia.

The deficit is expected to remain at about 3.4% of GDP this year, at par with the previous year before increasing further to 4.3% of GDP in 2025, based on the European Commission's projections.

Estonia's national debt stood at 19.6% of GDP in 2023, up from 18.5% of GDP in the prior year and just 8.5% of GDP in the pre-pandemic year of 2019. It is expected to increase further to about 21.4% this year and 24.6% in 2025. Despite the increase in the past four years, it remains the lowest debt level in the European Union.

Kallas resigned, and Michal voted as the new prime minister

Kaja Kallas was reelected as prime minister when her center-right Reform Party won in the March 2023 elections, ahead of the far-right EKRE Party. This meant that Estonia remains one of Ukraine's most staunch allies in Europe. In fact, Estonia was one of the first countries to provide Ukraine with defense assistance even before the start of Russia's full-scale invasion in February 2022. The country has provided nearly €500 million - more than 1.4% of GDP - worth of military assistance to Ukraine.

Kallas has become Estonia's first female prime minister after Estonian president Kersti Kaljulaid nominated her to form the government on January 14, 2021 - after the collapse of the previous governing coalition, led by the Centre Party.

However, after a year, Kallas resigned to take up the post of European Union's chief diplomat. In July 2024, the parliament voted in Kristen Michal as the new prime minister. Michal will lead the same majority coalition as his predecessor, consisting of Reform, the liberal party Estonia 200, and the center-left Social Democrats.

Michal pledged to address the country's ailing state finances by putting up an income tax and purchase taxes and to continue investing strongly into defense and security.

Sources:

1. Dwelling Price Index, 2010=100 (Statistics Estonia): https://andmed.stat.ee/
2. Experts forecast a quiet year for Estonia's real estate market (ERR): https://news.err.ee/
3. Construction (Statistics Estonia): https://www.stat.ee/
4. Baltics Real Estate Market Report 2024 (Ober Haus): https://www.ober-haus.lt/
5. Monetary financial institutions statistics (Bank of Estonia): https://statistika.eestipank.ee/
6. Estonia's rental market cooling: apartments going slower, for cheaper (ERR): https://news.err.ee/
7. ECB interest rates (European Central Bank): https://www.ecb.europa.eu/
8. Monetary policy decisions (European Central Bank): https://www.ecb.europa.eu/
9. Gross rental yields in Estonia: Tallinn, Tartu, and Pärnu (Global Property Guide): https://www.globalpropertyguide.com/
10. IMF Staff Completes 2024 Article IV Mission to the Republic of Estonia (International Monetary Fund): https://www.imf.org/
11. Republic of Estonia: Staff Concluding Statement of the 2024 Article IV Mission (International Monetary Fund): https://www.imf.org/
12. Economic forecast for Estonia (European Commission): https://economy-finance.ec.europa.eu/
13. Republic of Estonia (International Monetary Fund): https://www.imf.org/
14. Labor market (Statistics Estonia): https://www.stat.ee/t
15. In June, the rise in the consumer price index was the smallest of recent years (Statistics Estonia): https://www.stat.ee/
16. General government deficit and debt increased last year (Statistics Estonia): https://www.stat.ee/.
17. Government debt down to 88.6% of GDP in the euro area (Eurostat): https://ec.europa.eu/.
18. Estonia country profile (BBC News): https://www.bbc.com/0
19. Estonia's aid to Ukraine (Ministry of Foreign Affairs): https://vm.ee/
20. Kaja Kallas becomes Estonia's first female prime minister (Estonian World): https://estonianworld.com/