Economist: Rising prices, interest rates made home loan borrowers cautious

Residential buildings in Tallinn in the snow.
Residential buildings in Tallinn in the snow. Source: Siim Lõvi /ERR

The housing loan market in Estonia has been very active in the past couple of years, but by December 2022, the uncertain economic climate and general rise in prices and interest rates had made people cautious about taking out new housing loans. With support from rising wages, however, demand for housing loans is likely to improve from here on out, Bank of Estonia economist Gaili Grüning said Thursday.

The housing loan market was very active over the past couple of years. Demand in the housing market started increasing in the second half of 2020 and was supported by rapid growth in household incomes and the savings they had built up, according to a press release.

The real estate market received a further boost from the money withdrawn from the second pension pillar, and loans were also made more affordable by the average interest rate on housing loans issued by banks reaching record low levels.

The number of loans issued was 15 percent higher in both 2021 and 2022 than in previous years. Growth in the banks' housing loan portfolio peaked at 12.2 percent last September, since which time borrowing activity has backed off. Nonetheless, growth on year in the housing loan portfolio still remained very fast in December at 11 percent. Following an extraordinary amount of activity over the past couple of years, it was to be expected that the housing loan market would calm down.

Caution in an uncertain economic environment and the general increase in prices and interest rates led to a substantial decline in new housing loans in December, however. Banks issued a total of €170 million in housing loans that month, and the amounts paid out for new housing loans contracted sharply as banks issued one fifth less in new housing loans than they had in the same month in 2018 and 2019, ahead of the period of increased activity on the market.

Households' caution has markedly pumped the brakes on demand. High real estate prices combined with general inflation have made housing loans less affordable, especially for families with smaller incomes.

Demand for housing loans is likely to improve going forward, however. The housing market usually contracts in the first months of the year, and this year may be expected to follow that pattern. What happens next, however, will depend largely on households' confidence and their financial position.

The rise in the Euribor and general inflation will reduce enthusiasm for taking on new housing loans, but wages continuing to rise will offer some respite. Housing loans are generally taken out by households with an above-average income, which are also able to save more as well. These factors will support a recovery in confidence as well as in demand for housing loans.


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Editor: Aili Vahtla

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