Estonia's house price growth is decelerating

After a decade-long uninterrupted house price rises, Estonia’s housing market is now cooling, amidst a struggling domestic economy, coupled with high inflation, rising interest rates, and the adverse impact of the ongoing invasion of Russia of Ukraine. 

Demand is falling sharply. In the first half of 2023, the number and area of purchase-sale contracts of dwellings in the country fell by 24.1% and 21.9% y-o-y, respectively, based on figures from the Estonian Land Board. Likewise, the value of dwelling contracts also declined by almost a third in Q1 2023 from a year ago.

“If in 2021 the demand for new apartments exceeded the supply, and most of the apartments were booked and sold before the building was completed, then in contrast, from Q3 2022, the demand decreased sharply,” said Ober Haus. “In 2023, the impact of rising interest rates on the housing market is expected.”

As a result, house price growth is noticeably decelerating. During the year to Q1 2023, the nationwide dwelling price index rose by 9.16%, a sharp slowdown from the prior year’s 21% increase and the lowest y-o-y growth since Q1 2021, according to figures released by Statistics Estonia. However, when adjusted for inflation, prices actually declined by 6.8% during the year to Q1 2023 – its second consecutive quarter of y-o-y fall and its worst showing since Q4 2009.

Estonia’s house price annual change

Quarter-on-quarter, house prices were more or less steady (but fell by 1.5% in real terms) in Q1 2023.

By property type:

  • Apartments: prices rose by 6.83% y-o-y in Q1 2023, a sharp slowdown from annual increases of 18.46% in Q4 2022, 25.39% in Q3, 27.34% in Q2 and 20.24% in Q1, according to Statistics Estonia. In fact, when adjusted for inflation, apartment prices declined by 8.79%. On a quarterly basis, prices fell by 2.6% (-4.2% inflation-adjusted) in Q1 2023.
  • Houses: prices rose by 13.85% y-o-y in Q1 2023, after increasing by 13.85% in Q4 2022, 22.4% in Q3, 27.78% in Q2, and 22.81% in Q1. When adjusted for inflation, house prices dropped 2.07%. In Q1 2023, prices were up by 6.2% (4.6% inflation-adjusted).

In Tallinn, the country’s capital, the average price of apartments stood at €2,970 per square meter (sq. m.), according to Ober Haus. For new apartments, the average price reached €3,614 per sq. m. while for existing apartments, the average price was €2,723 per sq. m.

Estonia Dwelling Price Index graph

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

Estonia’s economy contracted by 1.3% in 2022 from a year earlier, in stark contrast to the robust growth of 8% registered in 2021, as the ongoing Russia-Ukraine war caused import prices to surge and adversely affected foreign investments. The economy is expected to remain weak this year, with its real GDP expected to decline by another 0.4% before returning to growth in 2024, according to the European Commission’s projections.

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.

Year Nominal Inflation-adjusted
2007 5.17 -3.55
2008 -19.64 -25.71
2009 -33.59 -32.30
2010 12.88 7.33
2011 11.76 7.30
2012 5.84 2.09
2013 15.56 13.83
2014 10.05 10.63
2015 5.12 5.64
2016 7.72 6.32
2017 4.88 1.07
2018 5.70 1.91
2019 8.19 6.36
2020 4.80 6.00
2021 20.42 10.13
Sources: Statistics Estonia, Global Property Guide

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.

However with falling demand, house price growth is decelerating fast. In fact, when adjusted for inflation, house prices started to decline last year.

Sales transactions now falling

During 2022, the total number of purchase-sale contracts of dwellings in Estonia fell by 18.1% y-o-y to 49,780 units, in stark contrast to the annual increases of 21.1% in 2021, and 2.5% in 2020, according to the Estonian Land Board. Likewise, the value of contracts declined by 4.4% to €5.31 billion over the same period.

During 2022:

  • In Tallinn, the number of purchase-sales contracts fell by 14.1% y-o-y to 12,407 units in 2022, in contrast to a 22.2% increase in 2021. Likewise, the value of contracts dropped 6.8% during 2022 to €2.23 billion, after increasing by a huge 48.1% in the prior year.
  • In Tartu, the number of purchase-sale contracts was down by a modest 4% to 3,227 units in 2022 from a year earlier, following an increase of 28.6% in 2021. In contrast, the total contracts value rose by 6.1% to €398.7 million, following a growth of 49.5% in 2021.
  • In Parnu, the number of purchase-sale contracts dropped 21.6% y-o-y to 1,967 units last year, after increasing strongly by 35.9% in 2021. Yet the value of contracts continued to increase by 6.9% to €235.26 million in 2022, following massive growth of nearly 65% in 2021.

The weakness of the housing market continued this year. In the first half of 2023, the number and area of purchase-sale contracts of dwellings in the country fell by 24.1% and 21.9%, respectively, as compared to the same period last year. Likewise, the value of dwelling contracts also declined by almost a third in H1 2023 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.

Estonia Property Sales Contracts graph

Construction activity showed mixed results

The number of apartments offered for sale in Tallinn and Harju increased by 50% from the same period last year, according to Ober Haus’ 2023 Real Estate Market Report.

“The most desirable, in the surrounding areas of Tallinn, are new or up to five years old and are 120-160 sqm with modern technical solutions and economic heating systems. Prices range between €200,000 and €300,000,” said the Ober Haus report.

Though, residential construction activity showed mixed results in Q1 2023.

For residential building permits:

  • The number of dwellings issued building permits fell sharply by 28.9% y-o-y to 1,330 units in Q1 2023.
  • The floor area of dwellings with permits also dropped 23.3% y-o-y to 127,400 sq. m.
  • The average floor area of a dwelling with permits rose by 8% y-o-y to 95.8 sq. m.

For dwelling completions:

  • The number of dwellings completed in Estonia surged 78.4% y-o-y to 2,225 units in Q1 2023, in contrast to annual declines of 3.2% in the whole year of 2022 and 11.1% in 2021.
  • Likewise, the floor area of dwellings completed increased by 51.2% y-o-y to 184,000 sq. m.
  • The average floor area of dwellings completed in Q1 2023 was 82.7 sq. m., down by 15.3% from a year earlier.

Estonia Construction Activity graph

The total housing stock in Estonia has recently reached 739,000 units, up 3.6% from four years ago, according to Statistics Estonia.

Good rental yields, the slowing luxury rental market

Gross rental yields for apartments in Tallinn are quite attractive, ranging from 4.2% to 6.05%, according to Global Property Guide research. Yields have been rising recently despite the fact that house prices in Tallinn continue to rise. They remain however very reasonable at between €131,500 and €295,000 for a two-bedroom apartment.

In other major Estonian cities:

  • In Tartu, the country’s second-largest city, gross rental yields are moderately good at an average of 5.38%.
  • In Pärnu, a popular holiday resort town in Estonia, yields are less attractive, at an average of 3.7%.

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

Despite attractive rental yields, the rental market slowed dramatically last year. 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 Mihkel Eliste, a certified appraiser and analyst at Arco Vara: “Since the latter half of August, rental prices in the more expensive segment have rather fallen. Typically you see a very sharp increase in rents at the beginning of September specifically in connection with the start of school, very much in Tartu in particular, but this year the rise in rent prices in both Tartu and Tallinn alike was seen in early summer or spring. By fall we were no longer seeing that demand had increased.”

Currently, two-bedroom apartments are rented out for about €480 to 520 per month while three-bedroom apartments are offered for monthly rents of €550 to €600.

Mortgage interest rates rising rapidly, following ECB rate hikes

In June 2023, the European Central Bank (ECB) raised its key interest rate on main refinancing operations by another 25 basis points to 4%, its eighth consecutive rate hike since July 2022 and the highest level since the 2008 global financial crisis. The interest rates on the marginal lending facility and the deposit facility were also raised to 4.25% and 3.5%, respectively.

“Inflation has been coming down but is projected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner,” said the ECB. “It therefore today decided to raise the three key ECB interest rates by 25 basis points.”

In line with this, mortgage interest rates are rising sharply. In April 2023, the average interest rate on outstanding housing loans was 4.89%, sharply up from 2.01% from a year earlier, according to the European Central Bank (ECB).

By original maturity:

  • Up to 1 year: 5.1%, up from 3.11% in April 2022 and 3.29% in April 2021
  • Over 1 and up to 5 years: 6.95%, up from 5.53% in the previous year and 6.34% two years ago
  • Over 5 years: 4.87%, sharply up from 1.97% in both April 2022 and April 2021

Estonia Interest Rates graph

Housing loans continue to increase despite rising 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 in 2022, housing loan growth accelerated to 11.3% from a year earlier.

In May 2023, the total value of housing loans outstanding rose further by 8.9% to about €10.78 billion from the same period last year, 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 30.5% of GDP from 2012 to 2022, based on Global Property Guide estimates.

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

Estonia Housing Loands Outstanding graph

Estonia’s economy struggling, and unemployment rising again

Estonia’s economy contracted by 1.3% in 2022 from a year earlier, in stark contrast to the robust growth of 8% registered in 2021, as the ongoing Russia-Ukraine war caused import prices to surge and adversely affected foreign investments.

“Estonia’s real GDP contracted by 1.3% in 2022, mostly on the back of a sharp fall in an investment of foreign intangibles and a negative trade balance, as Russia’s war of aggression against Ukraine, sent import prices soaring,” said the European Commission.

The economy is expected to remain weak this year, with its real GDP expected to decline by another 0.4% before returning to growth in 2024. “In early 2023, economic sentiment remained downbeat. Real GDP growth is expected to be negative again this year, projected at -0.4%, on the back of high inflation, tightening financing conditions, and subdued economic growth in major trade partner economies,” the European Commission noted.