Minister: Young families should not be obstructed in home loan applications

New builds in Tallinn's Lasnamäe district.
New builds in Tallinn's Lasnamäe district. Source: Siim Lõvi / ERR

Economics affairs minister Taavi Aas (Center) has said options for young families to obtain home loan guarantees from state agency KredEx should not be curtailed. Aas made his remarks Wednesday, following a Bank of Estonia announcement that the KredEx guarantees regime – which can see borrowers obtain loans of up to 90 percent of a property's value – should be tightened up, to avoid a real estate bubble and ensuing levels of too-high household debt.

Aas told ETV news show "Aktuaalne kaamera" (AK) that: "I do not think that we should start limiting the loan for young families now. They are still those individuals who do not have much scope in making their initial deposit, and I think that this support is extremely necessary for them."

"Of course, we also need to analyze why banks have started to approach KredEx more, what is the reason for this," Aas went on.

The Bank of Estonia (Eesti Pank), Estonia's central bank, announced Wednesday that housing loan guarantees issued by KredEx, a state body which has been active in issuing both major, high-profile loans during the coronavirus pandemic, and many more smaller loans and guarantees, should be tightened up, in order to avoid an overheating real estate market, which is very active right now despite the pandemic.

Bank of Estonia chief: Our recommendation to the government is to tighten KredEx guarantee requirements

Bank of Estonia governor Madis Müller said that: "Increasingly, KredEx guarantees are being used to reduce self-financing to as small a level as low as possible. Today, about 30 percent of new loans make use a KredeEx guarantee. Around 20 percent use it to reduce self-financing to a level of 15 percent."

"As a consequence, our recommendation to the government is really to consider whether it would be viable to better target the terms of the guarantee offered via KredEx," Müller went on.

Wage growth in most economic sectors has contributed to the active real estate market, the Bank of Estonia says, while the liberalization of the so-called second pillar of the Estonian pension system which came into effect at the beginning of the year has led to those who have cashed out, or will do so, having more funds to hand.

The bank said that: "The rapid rise in prices can be the result of a combination of factors: The coronavirus being brought under control and restrictions lifted, people's sense of confidence growing, cheap credit due to the central bank's monetary policy, banks' willingness to lend cheaply, and the more than €1 billion taken out of the second pillar in the autumn."

Bank of Estonia: New builds, purchases put on ice last spring now being realized

Jaak Tõrs, Head of the Bank of Estonia's financial stability department, told a press conference Wednesday that the recent growth is also the result of purchases of new builds put on hold last spring – since the construction of the new builds themselves was put on hold - with the arrival of the pandemic, now being realized.

"If we consider why the growth of real estate prices has been too rapid, one factor is that the construction of new dwellings was suspended in the second quarter of last year," Tõrs said.

Tõrs noted that the public may be afraid of losing out on real estate and as a result hurry to purchase it faster and take out a loan.

Under the current rules as established by the central bank, loans can be granted up to 85 percent of the value of the real estate used as collateral for the loan, while loan repayments should not exceed 50 percent of the borrower's income, in the case of non-KredEx loans.

Factor in KredEx guarantees, however, and banks can loan up to 90 percent of the value, a facility which has rapidly grown in popularity over the past year, Tõrs said.

Madis Müller said that the Bank of Estonia was well within its rights to tighten up requirements, meaning part of its role is to act as custodian, even when that might not always prove popular with people, while the real estate picture may be clearer in autumn.

Swedbank: Real estate prices may rise 9-10 percent in second half of 2021

One of the major high-street lenders, Swedbank, has forecast a rise of between nine and 10 percent in real estate prices in the second half of this year.

The phenomenon has called to mind the real estate boom in Estonia in the mid-2000s, where household debt burdens grew hugely.

Interest rates in Europe as a whole, however, are unlikely to change in the next few years, as a result of a European Central Bank policy aimed at restoring borrower confidence – contrasting with a recent announcement by U.S. treasury secretary Janet Yellen to the effect that interest rates their may rise in the future.

Chief economist at Swedbank's Tõnu Mertsina said that: "Euribor has started to move gradually upwards since the beginning of the year, but this rise is so marginal that it is still below -0.5 percent. The current forecast at least has it that that the six-month Euribor will not rise above zero in the next few years."

KredEx issued several high-profile, multi-million loans to major firms hit by the coroanvirus pandemic in 2020, including shipping line Tallink which picked up €100 million. The most controversial of the loans was the near-€40 million granted to the Porto Franco real estate project in central Tallinn, which was only part-completed at the time and was not generating revenue. Further scrutiny of the Porto Franco project by the internal security service led to, once it became public, the resignation of Jüri Ratas as prime minister, in January. More recently, proposals have been made to merge KredEx with the state's entrepreneurial support organization Enterprise Estonia (EAS), which also has international offices.


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Editor: Andrew Whyte

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