"If a customer was offered a loan of €100,000 last year, their salary, provided it has remained unchanged, would only get them a loan of €80,000 today," said Tanel Rebane, head of private banking at Luminor. Because real estate prices have not gone down to any notable degree yet, this has moved some properties out of people's reach.

The Bank of Estonia has stipulated that an individual's loan obligations must not exceed half of their regular income. Commercial banks often take a more conservative approach and set the limit at 40 percent. Banks also look at how much money a person would have left for paying bills and buying food after making their loan payments.

"Because the cost of living has gone up, many people who still qualified for a loan last year might no longer qualify today as they have less in the way of reserves. That is the main factor affecting lending," Rebane said.

Demand down, supply up

Does this mean we will see a dip in real estate prices next? Rebane said that while it is possible, things also depend on the property, developer and how quickly the latter wishes to sell. But demand will fall notably, with supply growing.

"There is more real estate on the market compared to last year, as high prices have motivated those who were holding back to sell. Soaring energy prices mean that simply holding on to real estate has become insensible as utility costs still need to be paid," the banker said.

The last two years have seen real estate prices grow by 20 percent. While analysts agree the current dip in prices will continue, opinions differ on whether the downturn will match the previous high.

"Recent prices make it impossible to describe the situation as a market slump; rather, we are talking about normalization," Tanel Rebane suggested.

Rising Euribor factored in a decade ago

Catlin Vatsel, head of private financing at LHV, said that their maximum loan amounts have also shrunk as virtually all expenses have grown for families. "We need to keep these things in mind when issuing loans and do it responsibly," she said.

The banks have been counting on the Euribor starting to rise at one point for the last decade, Vatsel emphasized. "Banks must calculate home loans with a rate of 6 percent that includes Euribor at 4 percent."

Swedbank is the only major bank in Estonia that has not altered its home loan conditions, its head of housing loans Anne Pärgma said. She added that Swedbank sports a personal approach in cases where people are between homes and have to service two loans at the same time. "That is when we will take a look at whether we think the person will be able to handle both loans for a period."

Another thing that Swedbank is keeping an eye on is private residences that are still under construction as prices are in flux. "We calculate the minimal construction cost and make sure people have a buffer should the project end up more expensive," Pärgma explained.

Sille Hallang, head of SEB's private banking division, said that the bank has not altered home loan conditions. "But because inflation has resulted in much higher everyday expenses, loan sums offered to customers have indeed changed. We make sure borrowers have enough income left for everyday expenses after servicing their loans."

Interest in home loans down

The number of new Loan applications is falling in tandem with loan sums on offer. Applications are down 30-40 percent depending on the bank and time period.

Swedbank had around 1,000 loan applications in the works earlier this year, while the figure has now dropped closer to 700, while actual interest might be more modest still, Pärgma suggested.

"The applications also reflect people wanting to understand how the market works, what to prepare for etc. Not every application means the person is about to commit to a transaction," she added.

Catlin Vatsel for LHV said demand is down 30 percent since this summer, both on the real estate market and for loans.

Tanel Rebane said that the situation is more or less the same at Luminor. He added that most people buy a home when they need one, not when the time for it is good or bad, for which they need to be given good advice by the bank and take a realistic look at their needs.

The banker said that when Euribor was negative, people got used to only looking at the relatively modest margin of banks. But loans are becoming more expensive now and decisions really need to be thought through.

"One solid recommendation is that a person's home should not cost more than their income over five years. If that is so, the customer will be able to service the loan even if Euribor hits 3 or 4 percent," he explained.

Estonia's demographic situation is another concern for banks, Sille Hallang explained.

"The most active borrower is 26-35 years old, which age group will shrink by 20 percent between 2021 and 2026. That is another indicator affecting the home loan market. We are simply running out of borrowers."

Borrowers able to service loans

All commercial banks told ERR that their portfolios are performing nicely and solvency problems have not become more common. Hallang suggested that while SEB is not seeing changes in its portfolio, it cannot be ruled out that high utility costs are yet to hit home.

Catlin Vatsel from LHV said that deposits have grown threefold since the last crisis. Talen Rebane offered that Luminor remains confident as it has pursued a considerate loan policy and is sure its portfolio has people who can afford to service their loans.

Bank representatives agreed that there will not be a repeat of the previous financial crisis and banks will not have to foreclose on people's homes as both banks and borrowers are much better prepared.

"I believe that no bank wants to start evicting people from their homes," Hallang said. She said that if people find servicing loan payments has become difficult, other expenses should be revisited first and people who are experiencing problems should contact the bank immediately.

"The sooner we learn of payment difficulties, the better," Hallang said, adding that a solution can be found in most cases. "But this requires the customer to work with us and not disappear."

Loan conditions not about to change

Representatives of commercial banks said that loan conditions are not likely to become even tougher in the future as banks already sport extremely conservative approaches.

"We have never issued loans lightly," Anne Pärgma said for Swedbank. "Lending has been, is and will remain responsible, with a conservative approach built in." She remarked that it is possible the difference between how much banks are willing to loan the same customer might be smaller in the future.

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