In Q3 2022 Swedbank Baltic Housing Affordability Index (MPI) rapidly went down in all three Baltic capital cities, according to the bank’s economist Laimdota Komare. Although wages are on a rise, the rapid housing price rise and higher interest rates cause housing affordability to go down.
The bank’s composed index reflects the average household’s ability to afford a 55 m2 large apartment with mortgage loan assistance in one of three Baltic capital cities. Considering the average interest rate and housing price, the bank calculated the average amount of money an average household can afford to divert towards monthly payments. Data is then contrasted with the development of one and a half average net wages in each individual city in question.
On an annual basis, housing affordability index has gone down considerably. The wage rise was behind apartment price rise. This, together with growing interest rates, had a negative impact on housing affordability. In Vilnius and Tallinn housing affordability index dropped to 120.9 and 119.6 respectively. Although housing affordability in Riga is considerably below previous levels, it remained the highest among Baltic capital cities – in Q3 it was 176.6. This value means that the income of households in Riga and wants to purchase a 55 m2 large apartment was 76.6% higher than necessary to divert no more than 30% of a family’s income.
Swedbank’s estimates indicate: in Q3 the average apartment price in Riga increased by 12%. A slower growth rate was observed for apartments located in older buildings (constructed before the year 2000). As for apartments located in buildings either constructed or renovated after the year 2000, price growth became more rapid. Affordability of these apartments is also slightly lower – the index value was 126.8 points.
It is most likely the price growth was sped up thanks to deals involving previously reserved new apartments.
Prices of these apartments are even higher and their affordability is even lower.
Record-high inflation and higher interest rates increased the financial burden of households. More expensive loan maintenance, as well as higher living expenses and concerns about a possible recession only served to reduce residents’ confidence. Buyers became more cautious, as demand for housing in Q3 went down. The number of deals went down by 6% when compared with Q3 of 2021.
In the first-hand market the number of deals went down and booking of housing under construction slowed down. A general drop in activity was observed in the second-hand market. Demand remains stable for relatively new projects in the second-hand market. This applies to projects built or renovated after the year 2000. Buyers who can no longer afford new projects are generally interested in this option.
Soviet-era housing, on the other hand, lost its attractiveness due to low energy efficiency. With the threat of heating bills going up, owners were interested in selling off these apartments quickly. The number of offers of these, especially large apartments, went up considerably this year. Due to lower demand, apartments in Soviet-era buildings suffered a price drop for several months in a row.
It is likely the increase in average prices in the coming months will be further supported by deals with pre-booked new project apartments, which are more expensive than the average housing.
Due to the ruling uncertainty, housing price may go down next year.
Low demand and higher interest rates may cause a slight price correction – around 5% or more. Of course, prices will differ between different segments. For example, residents should not expect a price drop for new projects. High construction costs and favourable situation for real estate project developers motivate them to maintain prices at their current levels.
Average wages continued growing in Q3. The net wage in Riga was 5.7% higher than it was a year ago. Although income increased, the rapidly growing inflation reduced the free funds available to residents. Next year the average wage increase come from the planned growth of minimal wages. Swedbank predicts an 8.5% increase of gross wages in 2023.
Also read: Though income inequality in Latvia is down slightly, it remains very high