Latvia’s housing market is now losing steam

Latvia’s house prices are now falling rapidly, amidst falling demand coupled with the continued increase in construction activity.

In Riga, Latvia’s capital city, apartment prices dropped 8.42% to €892 (US$981) per square meter (sqm) in June 2023 from the same period last year, according to Arco Real Estate’s figures. This is in sharp contrast to the prior year’s 14.45% price growth and its biggest y-o-y decline since March 2010.

When adjusted for inflation, apartment prices actually fell sharply by 15.16% y-o-y in June 2023. The huge gap between the nominal and real figures is due to high inflation. Inflation stood at 7.9% in June 2023, sharply down from 19.3% a year earlier but still far higher than the annual average of just 1.5% from 2010 to 2021. Inflation started to accelerate by late 2021, reaching a 26-year high of 17.2% in 2022.

Apartment prices in Riga fell by 1.33% (-0.04% in real terms) m-o-m over the same period.

“Despite the positive price fluctuations in April, apartment prices in standard-type buildings in Riga are falling for the second month in a row. In June, the price drop was the highest since last October,” said Arco Real Estate. “Apartment prices continued to decline in June, with prices falling by more than 2% in several neighborhoods over the month.”

Demand is now falling, as many buyers could not afford to take out loans due to a surge in interest rates and a decline in their purchasing power amidst high inflation. In Riga, apartment sales transactions fell by about 4% in 2022 from a year earlier, in sharp contrast to a huge increase of 20% in 2021, according to Ober Haus. This is supported by figures from Latio, which showed that apartment sales transactions in Riga dropped 6% y-o-y in the first eleven months of 2023.

Despite declining demand, residential construction activity continues to increase. During 2022, the number of new dwellings authorized in Latvia rose by 10.1% to 3,140 units, in contrast to y-o-y declines of 8% in 2021 and 6.5% in 2020, according to the Central Statistical Bureau. Likewise, the area of new dwellings authorized also increased strongly by 22.9% to 434,800 square meters over the same period.

The strength of the construction sector continued this year, with both the number and area of new dwellings commissioned rising by 10.3% and 18.7%, respectively, in Q1 2023 from a year earlier.

Latvia’s economy expanded by 2.8% in 2022 from a year earlier, following a 4.1% growth in the prior year, buoyed by strong private consumption and exports. Though the economy is now showing signs of a slowdown, with a projected real GDP growth rate of just 1.4% this year, amidst high inflation, based on projections released by the European Commission (EC).

House prices outside Riga

Housing markets in the vicinity of Riga are also losing steam. 

• In Ogre, the average price of standard-type apartments fell by 2% in June 2023 from the beginning of the year to €876 per sqm, according to Arco Real Estate.
• In Kauguri, Jūrmala, apartment prices dropped slightly by 1% to an average of €834 per sqm over the same period.
• In Salaspils, apartment prices declined by a modest 2% to an average of €883 per sqm.
• In Jelgava, apartment prices increased slightly by 1% in June 2023 from the beginning of the year to an average of €744 per sqm.

Latvia’s housing boom and bust

Latvia had one of the world’s biggest housing market crashes after 2007. In the second half of 2007 house prices began to fall, having risen almost 700% from 2000 to 2007, and inflation ballooned.

Latvia’s house price annual change

The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.1% in 2007 to 19.5% in 2010, despite Latvia securing a €7.5 billion standby loan from a group led by the European Union (EU) and the International Monetary Fund (IMF). The bailout prevented total economic collapse but was coupled with rigid austerity measures. The country’s fiscal deficit shot up, capital left the country, exports fell, and domestic demand collapsed.

• In 2007, apartment prices fell by 5% (-16.7% in real terms) from a year earlier.
• In 2008, apartment prices plummeted by 30.5% (-37.1% in real terms) y-o-y
• In 2009, property prices plunged by another 42% (-41.3% in real terms)

Then in 2010, the housing market started to recover, with house prices rising by 5% (2.4% in real terms). House prices continued to increase by 5.8% in 2011 (1.7% in real terms), 2.1% (0.5% in real terms) in 2012, 3.2% (3.3% in real terms) in 2013-14, and 0.4% (zero growth in real terms) in 2015.

The housing market regained its momentum in 2016, thanks to strong economic growth, coupled with limited supply. House prices rose by 7.6% (5.3% in real terms) in 2016 and by another 8.8% (6.5% in real terms) in 2017.

The housing market has lost momentum since, with house price growth slowing to 3.9% (1.3% in real terms) in 2018 and further to 2.8% (0.5% in real terms) in 2019. During 2020, house prices fell 1.5% (-1% in real terms) due to the Covid-19 pandemic.

After strengthening in 2021 with a house price growth of 11.8% (3.6% in real terms), the housing market slowed again last year, amidst high inflation and rising interest rates. House prices in Riga rose slightly by 1.6% during 2022 but actually declined by a huge 16% when adjusted for inflation.

Demand is falling again

Demand is now falling, as many buyers could not afford to take out loans due to a surge in interest rates and a decline in their purchasing power amidst high inflation. In Riga, apartment sales transactions fell by about 4% in 2022 from a year earlier, in sharp contrast to a huge increase of 20% in 2021, according to Ober Haus.

This is supported by figures from Latio, which showed that apartment sales transactions in Riga dropped 6% y-o-y in the first eleven months of 2022, following a 16% growth in 2021.

Foreigners, who buoyed the market in recent years, typically account for about 70% of all property transactions in the country annually. They are attracted to Latvia partly because it has one of the lowest house prices in Europe. In addition, foreigners get a five-year residence permit in Latvia if they buy residential real estate, under Immigration Law amendments implemented on July 1, 2010. The conditions were then:

• The transaction should exceed €142,000 (US$156,092) in Riga or Jurmala, or €71,000 (US$78,046) in other regions;
• Only non-cash funds may be used to buy real estate;
• The buyer must not have any real estate tax arrears in Latvia (and must never have had such arrears);
• Transaction concluded after July 1, 2010.

In September 2014, Immigration Law amendments increased the threshold for obtaining a residence permit and introduced other conditions and costs, if a foreigner’s real estate was registered in the Land Register after September 1, 2014:

• The minimum transaction value of the real estate must be €250,000 (US$274,810) in large cities or at least €125,000 (US$137,405) in other places (in which case at least two properties must be bought), according to Baltic Legal.
• The total cadastral value of the property at the time of acquisition should be at least €80,000 (US$87,939).
• Payment of a state budget contribution worth 5% of the real estate’s transaction value.

In recent years, most of the in-demand properties were located in Riga and Jurmala, according to the Office of Citizenship and Migration Affairs. Russians were the top residential real estate investors in Latvia, followed by Ukrainians, Chinese, Kazakhs, and Uzbeks, according to Arco Real Estate’s chairman of the board of directors, Aigars Smits.

Residential construction activity increasing

During 2022, the number of new dwellings authorized in Latvia rose by 10.1% to 3,140 units, in contrast to y-o-y declines of 8% in 2021 and 6.5% in 2020, according to the Central Statistical Bureau. Likewise, the area of new dwellings authorized also increased strongly by 22.9% to 434,800 square meters over the same period.

The strength of the construction sector continued this year, with both the number and area of new dwellings commissioned rising by 10.3% and 18.7%, respectively, in Q1 2023 from a year earlier.

By region, during the year to Q1 2023:

• In the Riga region, however, both the number and area of new dwellings commissioned fell by 13.9% and 23% y-o-y, respectively.
• In Pierīga, which accounted for 55% of total dwellings commissioned, both the number and area of permits rose strongly by 41.2% and 43.5%, respectively.
• In Vidzeme, the number of dwelling permits fell by 16.7% while the area increased by 27.8%.
• In Kurzeme, the number of permits dropped modestly by 4.5% while the area surged 82.6%.
• In Zemgale, both the number and area of dwelling permits dropped by 34.6% and 29.1%, respectively.
• In Latgale, the number of permits increased by 62.5% and the area ballooned to 158.3%.

Riga and Pierīga regions accounted for about 89.5% of all new dwelling authorizations in Q1 2023.

According to Arco Real Estate, the number of apartments offered for sale in the largest housing estates in Riga soared by 30% in June 2023 as compared to a year earlier. Purvciems had the largest supply while the smallest was in Bolderāja.

The total housing stock in Latvia reached 77.75 million square meters in 2020, the latest figures available from the Central Statistical Bureau of Latvia.  

Rental yields are good but the rental market remains underdeveloped

Apartments located in Riga city can earn yields ranging from 4.9% to 9.6%, according to research conducted by the Global Property Guide in November 2022. Gross rental yields in the center of Riga are 5.23% for a 2-bedroom apartment. Such an apartment costs around €750 per month to rent. In the Old Town, our research suggests that a typical small apartment of 50 sq.m. can yield around 6.1%.

However, Ober Haus’ figures are lower, with residential yields at the city center averaging about 3.7% in 2022, down from 3.9% in the prior year.

Round-trip transaction costs are low to moderate in Latvia. See our Property transaction costs analysis for Latvia and Property transaction costs in Latvia, compared to the rest of Europe.

Latvia’s rental market remains poorly developed, according to a study published by the OECD. About two-thirds of the rental market consists mainly of Soviet-era housing and a third of the population lives in overcrowded housing units. Only 12% of the country’s housing stock is offered as rental accommodations.

A new law on the Lease of Dwelling Premises came into force in May 2021, which regulates the relations between the tenant and the landlord of a dwelling – defining their rights, duties, and responsibilities, the grounds for termination of the contract, and the basic terms of the lease agreement.

Apartment rents rising

In Riga, monthly rents for two-bedroom apartments in new developments in the Centre rose by 9.1% to €660 (US$726) during 2022, according to Latio.

Rents for standard apartments located in residential areas in Riga in 2022, based on Ober Haus figures:

• One-bedroom apartments: €200 (US$220) to €400 (US$440) per month
• Two-bedroom apartments: €200 (US$220) to €450 (US$495) per month
• Three-bedroom apartments: €290 (US$319) to €550 (US$605) per month

 In the neighborhoods of Āgenskalns, Imanta, and Ziepniekkalns situated at the left bank, rents for 2-BR apartments in new projects ranged from €465 (US$512) to €610 (US$671) per month in 2022. In the neighborhoods of Purvciems, Kengarags, and Teika located in the right bank, rents for the same property in new projects ranged from €430 (US$473) to €490 (US$539) per month.

LONG-TERM RENTS IN TOP NEIGHBORHOODS & PROJECTS IN RIGA, 2022 (EUR/month)
Neighborhoods	Project Type	1-Room Apartment	2-Room Apartment
Āgenskalns	Serial project	265	335
	Unrenovated pre-war project	245	345
	New project	460	610
Imanta	Serial project	245	300
	New project	400	490
Ziepniekkalns	Serial project	250	315
	New project	350	465
Centre	Unrenovated pre-war time project	310	450
	New project	410	660
Purvciems	Serial project	250	315
	New project	370	475
Kengarags	Unrenovated historical project	215	290
	Serial project	235	290
	New project	370	430
Teika	Serial project	260	330
	New project	280	490
Source: Latio

Interest rates rising rapidly

In August 2023, the European Central Bank (ECB) raised its key interest rate further by 25 basis points to 4.25%, its ninth consecutive rate hike since July 2022 and the highest level since September 2008, amidst exceptionally high inflation. The interest rates on the marginal lending facility and the deposit facility were also raised by 25 basis points each to 4.5% and 3.75%, respectively.

“Inflation continues to decline but is still expected 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. It is, therefore, today decided to raise the three key ECB interest rates by 25 basis points,” said the ECB in its press release.

Following the ECB move, interest rates for housing loans are now rising rapidly.

For new housing loans, in June 2023:

• Floating rate and up to 1-year initial rate fixation (IRF): 5.35%, sharply up from 2.15% in June 2022 and 2.08% in June 2021
• 1-5 years IRF: 9.4%, slightly down from 9.86% in the previous year and 10.18% two years earlier
• 5-10 years IRF: 9.42%, slightly up from 9% in the same period last year and 9.04% two years ago
• Over 10 years IRF: 5.65%, up from 4.42% a year earlier

For outstanding loans, in June 2023:

• Housing loans with maturity of up to 1 year: 5.9%, sharply up from 3.13% a year earlier and 3.38% two years ago
• Housing loans with maturity over 1 year and up to 5 years: 10.79%, up from 9.42% in the previous year and 9.25% two years ago
• Housing loans with maturity over 5 years: 5.23%, far higher than the 2.3% in June 2022 and 2.25% in June 2021

The mortgage market continues to shrink

In 2022, the size of the Latvian mortgage market as a percentage of GDP contracted by 11.8%, sharply down from 20% of GDP in 2014 and 36.3% of GDP in 2010. 

The continued decline in the size of the mortgage market indicates that it has not yet truly recovered from the 2008-09 global financial crisis, despite the introduction of the state-guaranteed Mortgage Loan Programme in 2015, under which the Latvian Development Finance Institution (ALTUM) provides guarantees for mortgage loans for families with children and young professionals.

Up until December 2022, a total of 22,643 guarantees totaling €179.2 million (US$197.6 million) of state aid for housing purchase was granted under the Programme for Housing Guarantees for Families with Children, according to ALTUM’s interim financial report for 2022. In addition, there were a total of 4,297 guarantees worth €43.7 million (US$48.2 million) issued to young professionals since the program’s inception.

However, mortgage guarantees issued under the two programs actually declined last year.

• Housing guarantees for families: €28.5 million (US$31.4 million) in 2022, down by 16.7% from a year earlier
• Housing guarantees for young professionals: €8.6 million (US$9.5 million) in 2022, down slightly by 2.3% from the previous year

 “The decrease in volumes is due to the sharp rise in construction costs, creating considerable uncertainty in the real estate market. Some potential buyers are postponing the purchase of a property, but this process is likely to be short-lived as price increase will continue, so each month of postponement will increase the purchase price,” said Altum.

Yet financing and state support remain insufficient. About 44% of households are unable to qualify for the government’s financial assistance or meet mortgage requirements, the OECD study noted.

In June 2023, the total amount of outstanding housing loans rose by 2.4% to €4.75 billion (US$5.24 billion) from a year earlier, a sharp deceleration from a y-o-y growth of 8.7% a year ago, according to ECB figures.

Latvia’s economy slowing, but the labor market is still strong

Latvia’s economy expanded by 2.8% in 2022 from a year earlier, following a 4.1% growth in the prior year, buoyed by strong private consumption and exports. 

After registering a robust annual growth of 8.6%, on average, from 2000 to 2007, the economy plunged into a prolonged recession during the global financial crisis. The Latvian economy contracted by 3.2% in 2008, 14.3% in 2009, and 4.5% in 2010. The economy recovered since, but growth had been more uneven and modest, with an average annual growth of 3.3% from 2011 to 2019. The country suffered another economic contraction of 2.2% in 2020, due to pandemic-related restrictions and lockdowns.

The Latvian economy is now slowing again, with a projected real GDP growth rate of just 1.4% this year, amidst high inflation, based on projections released by the European Commission (EC).

“In 2023, GDP is forecast to grow by 1.4%, hampered by high inflation weighing on private consumption and a delay in public investment programs,” said the European Commission. “Growth is expected to pick up by mid-year as inflation subsides and investment gains momentum. The economy is set to continue on this trajectory in 2024 with GDP growth reaching 2.8%.

The country recorded a budget deficit of 4.4% of GDP in 2022, down from a shortfall of 7.1% in 2021, according to Eurostat. However, it remains far above the pre-pandemic average deficit of below 2% of GDP from 2012 to 2019.

The EC expects Latvia’s deficit to fall to 3.8% of GDP this year and further to 2.7% of GDP in 2024.

 Latvia’s public debt fell to 40.8% of GDP in 2022, down from 43.7% in 2021 and 42% in 2020 but still higher than the 36.5% of GDP recorded before the Covid-19 pandemic. The public debt is expected to remain around 40% of GDP in the next two years.

Labor market conditions continue to improve. In Q1 2023, nationwide unemployment declined to 6.4%, from 6.7% in the previous quarter and 7.3% from a year earlier, according to the Central Statistical Bureau of Latvia. This is also much lower than the country’s jobless rate from 2009 to 2012, which averaged 17.1%, then fell to 8.7% from 2013 to 2022.

Inflation eased to 7.9% in June 2023, sharply down from 12.1% in the previous month and 19.3% in the same period last year. It is now below the central bank’s revised target of 10.9% for the full year of 2023 and is the first time that inflation dropped to single-digit since February 2022. Inflation surged to a record high of 22.2% in September 2022.

On January 1, 2014, Latvia adopted the euro. Then in July 2016, the country officially became the 35th member of the prestigious OECD.