Bank of Estonia: As real estate prices grow, so do housing loan sizes

Apartment building in Tallinn.
Apartment building in Tallinn. Source: Siim Lõvi/ERR

While Russia's full-scale invasion of Ukraine initially made households in Estonia more cautious about borrowing, demand for loans has since quickly recovered. As prices on the housing market continue to rise, the average size of housing loans has increased as well, the Bank of Estonia said on Thursday.

Demand from households for housing loans remains large. There were €168 million of housing loans issued in April, and the banks' housing loan portfolio had increased in size by 10 percent on year. While the Russian invasion of Ukraine initially made households in Estonia cautious about borrowing, demand for loans recovered quite quickly, the central bank said in a press release.

While less money was issued in housing loans in April than during last fall, more was issued than last spring. The housing market remains active, and prices continue to rise. The average housing loan issued in April was 12 percent larger in size on year, reflecting the increase in prices on the real estate market. Demand has been maintained by savings that households have built up as well as by strong growth in incomes.

The amount of money loaned by households in car leases last month remained steady on year at around €32 million. The number of lease contracts fell somewhat, and was lower than during the spring prior to the COVID-19 pandemic.

While previously, leases were signed in equal amounts for both new and used cars, in the past two years, around two thirds of contracts signed with private individuals have been for used cars. The current limited supply of new cars is also leading to increased prices, which in turn also means increasing the average size of a car lease.

In the first quarter of 2022, some €200 million in consumption loans were taken from banks and other creditors in Estonia, up by €25 million from the first quarter of the previous year.

A total of €87 million was borrowed from banks in the form of consumer loans, remaining steady on year; this indicates that the general decline in confidence as well as the rise in prices have not yet particularly reduced the demand for consumer credit.

The price of household bank loans, meanwhile, has continued to fall. The average interest rate on new housing loans with a mortgage in April remained at its record low of 1.9 percent, down from 2 percent in April 2021. The average interest rate on car leases signed with households, meanwhile, stood at 2.4 percent, down from 2.5 percent in April 2021.

The lower interest rate indicates that households' loan servicing costs are lower. The current average interest rate consists primarily of banks' interest margin, however, and the Bank of Estonia notes that consumers should bear in mind that interest rates may rise in the future.


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Editor: Aili Vahtla

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