While the number of construction projects in the real estate market is notably large, no bubble burst such as the one that occurred in 2007 is to be expected, SEB economic analyst Mihkel Nestor said.
One does not need to be an analyst or real estate expert to see that the Estonian real estate market has been active for the past few years, Nestor said, adding that Tallinn and Tartu are full of cranes and whole new districts have been erected.
"Even in small towns where no major construction activity has occurred for decades, new buildings have suddenly popped up and many have also undergone renovations," Nestor said.
Construction volumes also indicate that the number of new buildings in Estonia even exceeds that from the notorious year 2007. While during peak real estate boom at the time, authorization for use was issued for altogether 567,000 square meters of residential space per year, the corresponding figure last year was 585,000 square meters. The new record will be reached this year, however, as a total of 518,000 square meters of residential space has already been granted authorization for use in the first three quarters alone.
The price level of residential real estate also greatly exceeds that of 2007. While the average price was up to 1,200 euros per square meter in 2007, real estate transactions today are carried out at around 1,300 euros per square meter on average. Few people are able to buy a new home using their savings alone, thus the total volume of home loans issued to households by banks have grown from 5.6 billion euros in late 2007 to close to eight billion.
"Have Estonians again borrowed beyond their means and will we see the scenario from 2007 repeat itself? Definitely not," Nestor said, adding that on closer inspection, it instead becomes rather difficult to spot any similarities between the two periods. "When comparing construction volumes, one must also take into account that the range of customers has changed, as has their purchasing power," Nestor said.
The number of buyers is currently high on the real estate market. While real estate is generally bought by people of all age groups, the largest share of home buyers is aged around 30 or over. Due to the baby boom in late 1980s and early 1990, the number of people in this age group has reached a record high over the past few years, and notably exceeds the corresponding figure in 2007.
People's purchasing power is very different, too, Nestor said.
"While the average gross income in 2007 totaled slightly more than 700 euros, this year it already exceeds 1,400 euros. Therefore, if the average gross salary bought you 0.6 square meter in an average apartment, today's average gross income will get you over one square meter. Households' debt-to-income ratio has also significantly declined," he noted.
The analyst added that households' savings, too, are indicative of the changes that have occurred since 2007, when the yearly consumption of people exceeded their earnings. Estonians today are able to save around 12 percent of their income, thus exceeding the average in the European Union.
Editor: Helen Wright