BNN ANALYSES | Lithuania’s central bank wary of real estate market’s over-heating, acts to shun burst

Linas Jegelevičius for the BNN
The housing loan portfolio of Lithuania’s banks grew at a much faster pace than in any other eurozone country this year, which signals that the country’s booming real estate market may be over-heating, says Gediminas Šimkus, head of the Bank of Lithuania. Real estate prices have been soaring at a record pace, he says, currently 17 percent above what they were a year ago.
«According to the Centre of Registers, there were 30-percent more real estate purchase contracts this year than during the same period last year and 25 percent more than in 2019,» Šimkus says.
But some economists, like Sigitas Besagirskas, downplays the apprehensions over what the central bank’s head says are emerging troubles in the market. «I believe the fears are not substantiated – we will not see an overheat of the market in the new future, although some signs (in the market) may appear worrisome. The availability of money from the EU’s infrastructural funds (to be distributed soon) will tangibly increase money supply in the country…» Besagirskas told BNN.
However, the Bank of Lithuania is not taking any chances, as any shake-up in the housing market could lead to destabilisation of the country’s financial system. The Bank of Lithuanian has announced this week new initiatives aiming to keep things under control. The bank proposes to introduce a universal real estate tax payable by all property owners.
According to Šimkus, a general and socially oriented non-commercial real estate tax would boost the sustainability of the housing market and limit the ungrounded incentives to invest in real estate.
«I believe such a measure could reduce Lithuanians‘ obsession with real estate, but not much, however. Ironically, Lithuanians do not want to invest in bonds, art, gold – only real estate appeases their investment appetite,» Besagirskas noted to BNN.
The Bank of Lithuania has submitted proposals to the Ministry of Finance to apply the real estate tax to all real estate without any exceptions by setting a minimal non-taxable real estate value limit to protect the most vulnerable residents. The tax should be progressive, i.e. the initial tariff should be very low, e.g. 0.1%, and increase in case of very high-value and luxury real estate. This would mean that for the majority of residents the tax would equal tens of euros annually and in regions, where the value of housing is lower, it would be rather symbolic or the housing would be non-taxable.
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On the other hand, real estate that costs hundreds of thousands of euros or luxury real estate that costs millions of euros would be subject to significantly higher taxes, amounting to hundreds or even thousands of euros.  It is estimated it could bring in over 150 million euros to the state coffers.
Lithuania’s PM Ingrida Šimonytė has said that the Seimas, the country’s Parliament, could deliberate the proposal in the spring parliamentary session.
Between January and September this year, Lithuanian banks issued 50 percent more in housing loans than over the same period in 2019, according to the governor of the Bank of Lithuania. During the same time, the housing loan portfolio held by the country’s banks and credit unions grew more than 11 percent – the highest rate in the eurozone.
«If the trends continue, we could be facing serious challenges to our financial stability in the event of a housing market correction,» Šimkus said during the central bank’s annual real estate conference on Tuesday, November 23. «A two-digit rise in housing prices has been reported in most European countries, while overall pace in the EU has been the biggest since 2007,» according to him.
The central bank chief says that housing in Lithuania was still relatively affordable, even though it was currently 7-percent overpriced.
To protect the market, the Board of the Bank of Lithuania has already approved the amended Responsible Lending Regulations introducing a bigger down payment requirement for the second and subsequent loans and intends to take a decision on the systemic risk buffer (SRB) of 2 percent for the housing loan portfolio of credit issuers.
According to the Bank of Lithuania, the overall flow of new loans could shrink by up to 10% due to the tightened down payment requirement and the intended SRB for the housing loan portfolio of credit issuers, and the growth of housing prices could decrease by up to 3 percentage points.
 A doubled minimum down payment requirement for second and subsequent housing loans of 30% should affect around 40% of individuals taking their subsequent loans. This share of individuals should be required to pay a bigger down payment. Housing loan interest rates should not be affected by the said measure. They could increase by as little as 0.05 percentage point due to additional capital requirements.
 Currently, new housing loans are being granted with an interest rate of 2.12% on average. Since the beginning of the previous year, it has decreased by 0.25 percentage point.
Another measure is the mandatory registration of preliminary purchase-sale agreements for unbuilt housing. Such a legislative amendment would contribute to the transparency of the primary market, says the Bank of Lithuania. In real time, it claims, the transaction and price trends in the primary housing market, the extent of speculative transactions, to identify more accurately the risks of overheating of the housing market and to take action to mitigate these risks.
The Bank of Lithuania has submitted proposals for mandatory registration of agreements to the Ministries of Justice and the Environment and awaits their conclusions.
Finally, the sustainable development of the market would be facilitated by reduced shadow activities in the real estate sector, says the Bank of Lithuania, e.g. by legitimising the requirement to make the down payment or even the entire purchase of housing transparent and by limiting the payment for real estate in cash.
Seemingly, the initiatives may be already impacting Lithuanians‘ affinity with real estate.
«Quite surprisingly, there was a significant slowdown in new house and apartment purchases in Palanga this autumn. I got the feeling people would rather wait now and see what happens next,» Regina Lingė, a real estate broker in Palanga, told BNN.
The resort has seen a record-high hike of up to 20 percent in RE prices this year. A similar growth was also registered in Vilnius.
But elsewhere the real estate market is booming. Alvydas Guginis, owner of NekTur Group, a real estate firm in Naujoji Akmenė, a municipality in north-western Lithuania, told BNN that local property prices skyrocketed nearly a whopping 1000 (!) percent over the last 10 years. «Just this year alone they went up to 20 percent here. The growth was largely prompted by the opening of a large factory of Vakarų medienos grupė, a major wood processing and furniture manufacturing company which aliases with IKEA,» he says.
Other Lithuanian towns also saw rise from 10 to 20 percent in real estate prices this year.