Interest hikes have not led to lower real estate prices

Apartments in Tallinn.
Apartments in Tallinn. Source: Siim Lõvi /ERR

High home loan interest rates have done little to affect real estate prices in Estonia, with the latter even inching upwards in recent months. Economic experts believe that prices could come down once unemployment starts rising.

While the number of real estate transactions was down year-over-year in the second quarters of 2023, prices have not followed suit. Land Board data suggests prices of new apartments have been rising for thee consecutive quarters in Tallinn, with the average price per square meter now at €3,900. The price of second-hand apartments also rose in the second quarter, to €2,800 per square meter.

"It seems that people who are in search of a new home have given up on waiting and are going ahead today. We're no longer seeing people holding off in hopes of the market coming down," Mihkel Nestor, economist for SEB said.

He added that nothing drastic will happen for as long as unemployment remains low.

"Estonia has record employment, with average salary growth of over 10 percent. It is very difficult to see why prices should come down in this situation?"

That said, prices aren't forecast to grow either. They will stay where they are if all goes well or come down slightly, Rain Leesi, head of Avaron Asset Management, said.

"But should the economic situation deteriorate and unemployment head up, we will likely see the other scenario where prices will have to come down," he added.

Historically record low interest rates have seen the average price of apartments in Tallinn go up two and a half times over the past decade.

The dwindling number of potential buyers is also sure to affect the real estate market in the coming years.

"The average home loan client is in their late 20s. /.../ There are already around 40 percent fewer people in this age group, based on the drop in birthrate in the 1990s. And this trend is only set to deepen," Mihkel Nestor said.


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Editor: Marcus Turovski

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