SEB: Estonian construction market to slow down significantly in near future

Mihkel Nestor.
Mihkel Nestor. Source: ERR

The decrease in construction permits issued in Estonia indicates that a significant slowdown is to be expected in the construction market, SEB analyst Mihkel Nestor said on Monday.

Nestor told the Baltic News Service that the current growth in construction volumes is no surprise, as the interest in purchasing and developing new housing is currently very high.

"Firstly, the situation in the labor market is very good today—employment is at the highest level it has ever been, and the average wage is increasing by 7% each year. Secondly, in the long term perspective at least, loan interest remains very low. The third and the most important reason is demographic—the large generation born at the end of the 1980s has reached the age where they are buying their first home," Nestor said.

In the future, however, a significant slowdown can be expected to occur in the construction market. The decrease in construction permits issued is indicative of the downward trend, which is to intensify in the coming years. "Demographics is once again the reason, as the number of births in the 1990s decreased by almost half within a few years compared to that of the end of the 1980s," he added.

According to Nestor, it is difficult to forecast how the forthcoming decrease in European Union support will affect state investments in the new budgetary period. The construction of Rail Baltica, currently gaining speed, could help mitigate the potential decline, he added.

The shrinkage of construction activities by Estonian businesses abroad is due to a negative trend in the Swedish and Norwegian markets, Nestor said. "Looking at the decline in construction permits, the volumes in the Scandinavian markets are not expected to grow in the future."

The total production of Estonian construction enterprises in Estonia and in foreign countries increased by 16% in the third quarter of 2018 compared to the same quarter of the previous year, Statistics Estonia said on Monday.

Taking into account the Estonian construction market only, the construction volume increased by 18%.

Meanwhile permits were granted for the construction of 1,673 buildings, which is 4% less than in the third quarter of 2017.

"The year 2018 will indeed be a record year in terms of construction volumes. The construction market is first and foremost affected today by the strong momentum in the construction of residential buildings, which is supplemented by state investments in infrastructure projects," Nestor said.

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Editor: Dario Cavegn

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