Bank of Estonia: Dwelling real estate market balanced

Ardo Hansson (left) and Madis Müller (right).
Ardo Hansson (left) and Madis Müller (right). Source: (Postimees/Scanpix)

According to vice president of the Bank of Estonia, Madis Müller, the dwelling market is not about to overheat. The market for business real estate is much more likely to become a problem, as a lot of floor space has recently been added.

Müller said at the Bank of Estonia’s press conference on the economies and financial sectors of Estonia and the eurozone that last year the home loan portfolio of Estonian banks had grown by 5 percent. Among all loan portfolio growth reported, car leases have increased the most.

People’s savings had grown faster in 2016 than their loans, which was a positive sign, Müller said. “In our assessment there is a pretty reasonable balance between incomes, loans, and savings,” Müller said. Commenting on real estate prices, he pointed out that monthly statistics didn’t accurately reproduce fluctuations in the prices of apartments.

“While in 2014 new apartments made up 14 percent of all transactions, last year this share reached almost a third of the total, some 30 percent,” Müller said.

Because of this the real growth of apartment prices was lower than indicated, some 6 to 7 percent instead of the 11 percent stated in the Land Board’s statistic.

“In a situation where salaries are growing at almost the same rate, and also home loans, such a 6 or 7-percent price increase in our assessment doesn’t point to an overheating market,” Müller added.

Demand had recently increased on the real estate market, and this had been supported both by fast salary growth as well as further movement of people towards the cities. This is a trend the bank sees changing, which in his assessment means that demand can be expected to decrease again.

Müller added that though development activity was lively when it came to building new apartment blocks, this activity was even higher in commercial real estate.

“A lot of new shopping centers and office space has been built. The rent prices did not change over the last year, and there are first indications of an increase in available floor space.” With that, the trend towards an overheating market was more acute in this market, not in dwelling real estate.

President of the Bank of Estonia Ardo Hansson said that risk to Estonia’s financial stability in the short term was low.

Sweden’s increasing real estate prices were a reason for worry, Hansson pointed out. The loan burden on households was increasing as well. If a sudden blowback from the Swedish real estate market should occur, this could increase risks to the liquidity and financing capabilities of Estonian banks as well.

Another potential source of risk is internal. If the profitability of Estonian companies should drop because of salaries growing faster than revenue, this would weaken companies’ ability to pay back their loans, and in turn affect the loan quality of banks.

A third, if slightly smaller risk is connected with Estonia’s real estate market. So far there has been no sign of a sudden increase in loans and prices, but the conditions were favorable for prices to grow further. “Looking at the last half year, the loan and price growth has accelerated slightly. We don’t see any big changes, but this could mean slightly increased risk compared to six months ago,” Hansson said.

Editor: Dario Cavegn

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