Booming economy brings up Estonia's housing prices

  • 2006-03-15
  • By Kairi Kurm

KEEP DREAMING: Market research shows that real-estate prices have not only shot up for new housing developments, but for those crumbling old Soviet block apartments as well.

TALLINN - Estonia has claimed the crown for the highest increase in real estate prices throughout Europe in 2005. The Royal Institution of Chartered Surveyors reported last week that the average price for a home in the Baltic state increased by a remarkable 28 percent, compared with 22 percent in Denmark and 15 percent in Spain.

Indrek Toome, development manager at SRV Kinnisvara, offers a rather inverse explanation for the surge: It's not that real estate prices are especially high today, he says, but that they were too low to begin with. "The cost of land was low, and the cost of construction personnel was low. There were less solvent people," Toome explains. "Profits on such projects were low, otherwise developers would not have been able to sell these properties."
But that was then, he adds; the situation has changed dramatically. "People's overall well-being and income have risen. The low mortgage rates driven by competition is an important factor as well."
Hindrek Leppsalu, manager at Ober-Haus Real Estate Company, says that Estonia's real estate prices could have increased by as much as 35 percent last year.

Other experts told The Baltic Times that the trend was mostly due to favorable mortgage loans, an expanding economy, a rise in salaries and a lack of available homes. "There are simply not so many new apartments. The supply is limited by inefficient city planning, which takes a lot of time, and by a lack of construction industry capabilities, although it is based on market economy and should therefore be solvable," says Viljar Arakas, chairman of the board at Arco Vara.
Arakas predicts that prices will increase as long as the economy continues to grow. Estonia's GDP increased by about 9 percent last year, compared with 2 percent among older EU countries. The average salary increased by 10 percent.
"People believe in economic growth and are not afraid to lend money," stresses Leppsalu.
Since July 2004, mortgage interest rates in Estonia have been lower than comparable rates in the eurozone. As competition in the banking sector is strong, banks have become very flexible in granting loans. The current maximum lending period stands at 30 years, and credit may be granted for up to 100 percent of the property value.
"During the last five years the average interest rate on mortgage loans has decreased by roughly 5 percent. This is a major price signal by any standards and the property boom is just a response to that signal," says Hardo Pajula, an economist at SEB Uhispank, in reference to the average 4 percent interest rate.

"Moreover, the unprecedented low interest rates have also had important second round effects in terms of improving the overall business climate, boosting incomes and making more and more people capable of entering the mortgage market."
Indrek Hinno, an analyst at Nordea Bank, explains that banks have been selling their mortgages aggressively while bringing down their lending criteria. Although mortgage rates have increased due to EU pressure, they've had little effect on lending.
"There's an opinion in society that real estate is currently a good purchasing decision," said Hinno.
Maris Lauri, an analyst at Hansabank, says that real estate agencies very often lie to the public on behalf of their own sales interests. As a result, many people are convinced to invest in property. "I think that the role of the press and of anticipated price movements has ushered in a speculative phase in this price rally," he says.
The price of new apartments jumped a massive 30 percent in 2005 and as much as 50 percent in downtown Tallinn, Ober-Haus reported in its recent market research. And demand continues to outpace supply. In fact, old Soviet block flats are selling at levels only 20 percent less than newly built apartments. In such cases, Toome warns that people might not receive a fair price if they one day decide to sell.

But it's not only locals who purchase real estate. Estonia is known in the U.K. as an investment hotspot. British and Irish investors could, in fact, be the ones "blamed" for the boom in downtown Tallinn.
Leppsalu believes that foreigners account for at least half of Tallinn's downtown real estate deals. Many foreigners working in Estonia have not passed up the opportunity to purchase a flat, as prices are two to three times cheaper in the Baltics than in Scandinavia, said Leppsalu.
Aimi Raudam, a board member of Property in Estonia Haldus OU, buys apartments from British and Irish investors, furnishes them and then rents them out. In her opinion, apartments are not expensive in Estonia and the market could be of interest for another two years.

In downtown Tallinn, prices range between 2,100 and 3,400 euros per square meter, reaching up to 3,500 euros in the Old Town. The most inexpensive new housing can be found in the suburbs, starting from 1,450 euros per square meter.
Most apartments are sold before project completion. IT specialist Mari Kamp has been on a waiting list for a planned residential area since before construction even began. She just recently learned that the price of her two-room flat of 45 square meters was 2.1 million kroons (134,000 euros) and that her name is still far behind on the list.
"I don't understand who buys these flats if normal people don't even have a chance," says Kamp. "Wherever a new house is being built, it has been sold and booked. The requirements are very tough. The booking fees have to be paid fast. It is very tiresome, and I don't want to deal with it any more."

She also thinks prices are too high. There was another, similar offer at the beginning of 2004, for a price twice as cheap. Now she and her boyfriend are dreaming of building a house in a suburb.
Supply is expected to stay lower than demand for the next two to three years, as the number of detailed plans is still low and construction periods have lengthened due to a lack of personnel on the labor market.