Central Bank: Real Estate Price Rise Normal, Households Cautioned Against Overoptimism ({{commentsTotal}})

Real estate prices have been soaring, prompting the central bank to caution against overoptimism.

Estonian apartment prices rose more than 20 percent year-on-year in the last quarter of 2013 and the growth continues.

Wage growth has also been significant but real estate price increases are outstripping it.

Households that bought homes in 2006-2007 during the last peak have been taking advantage of the rise in prices to move house after deferring such decisions for years, while low supply of living space is also driving the increase.

"Although the rise in prices and high demand could encourage developers to increase supply, developers and banks have acted […] quite conservatively to this point," said the central bank in an overview released today.

"In a low interest rate environment, there is the danger that continued real estate price increases will lead to overoptimistic expectations in households," the bank warned, though.

"Due to the rise in prices, the capacity of households to buy housing has decreased and the unfavorable development in the external environment may deal a setback to the real estate market."

It said that as long as bank lending policies stayed the same, there would be little risk. The central bank also said most of the external risks to Estonian financial stability in the next six months were minor as well, though it issued a stock warning regarding some blowback from escalation in the Russia-Ukraine crisis.