At the beginning of the year housing availability index in Baltic States started limping. The shocks caused by the war in Ukraine have impacted the real estate market a lot. Growing construction costs, shortage of construction materials and rapidly growing inflation causes concerns regarding housing availability in the near future.
Swedbank Baltic Housing Affordability Index (MPI) reflects an average household’s ability to afford a 55 m2 large apartment with mortgage assistance in one of Baltic capital cities.
Average monthly payments are calculated based on average interest rates and housing prices and are contrasted with the development equal to one and a half average net wages in cities in question.
Housing affordability index increased in Vilnius and decreased in Riga and Tallinn over the course of the year.
At the beginning of the year low interest rates carried affordability, but it was not sufficient to improve it in Riga and Tallinn over the course of the year. In these two Baltic capital cities housing price growth exceeded wage growth. In Vilnius, on the other hand, wages increased more rapidly than prices, allowing the index to climb. It is worth mentioning that, when compared to Q4 2021, housing affordability index has gone down in all Baltic capital cities. In spite of fluctuations, the index shows that at current market conditions and predictions based on the index, residents in average households in all Baltic capital cities are still able to afford housing.
Data indicates that in Q1 the average price in Riga had increased by 8.9%. It should be said, however, that transactions are still registered with a delay. Statistical information lists deals that are done, not apartment bookings. Rapidly growing construction costs have significantly inflated booking prices. As a result of this, the price rise for new apartments in Q1 2022 may turn out more rapid than what the data suggests (+4.9%). In some cases the period of time between booking and signing of a purchase contract lasted up to two years.
Average wages also continued growing at the start of 2022. However, a part of this growth is already being consumed by the rapidly growing consumer price level.
It is expected for residents’ purchasing power to go down this year. The recovery period, on the other hand, is expected no sooner than next year. With inflation up, the amount of funds available for residents goes down. Together with uncertainty about the future price growth rate, some residents may be in a rush to acquire housing now, fearing the future price rise. This may result in a short-term market activity rise with a relaxation of the market later on, Swedbank reports.
The war in Ukraine has caused inflation to grow worldwide. As a result, central banks, including European Central Bank, have decided to raise interest rates in an attempt to battle the growing price level. Most mortgage loans in Baltic States include a variable interest rate. Interest rate rise increases mortgage loan maintenance costs, which could reduce residents’ readiness to increase existing ones or take on new loans. Swedbank’s latest housing affordability index includes scenarios that detail changes to housing affordability as a result of interest rate increase. These scenarios indicate that housing affordability will go down considerably but will remain accessible nonetheless. The third risk scenario, the possibility of which is very low, indicates that housing will become unavailable in Vilnius and Tallinn. Average housing in Riga remains affordable. Apartments in new project buildings, on the other hand, will become unavailable under this scenario.
Growing construction prices will pull housing prices up. Wage growth, on the other hand, will not be as rapid as it was last year. Rapidly growing inflation reduces working people’s wages and free funds. Interest rate growth will also increase mortgage loan maintenance costs, and growing monthly mortgage loan payments will cause more pressure for residents’ purchasing power. Under these factors, no improvements of housing affordability are expected in the near future, the bank reports.