Is the Baltic property bubble about to burst?

  • 2007-08-15
  • By Gary Peach

DEFLATING: Experts agree that real estate prices will fall as economic growth slows in the Baltic states, the question now is how much.

RIGA - A Western bank has forecast that Baltic property prices, which have been the source of fantastic speculation 's and wealth 's in recent years, have reached their zenith and that the real estate market is about to undergo a major reassessment downward.

Danske Bank, which hasn't shied from criticism of the Baltic governments for failing to deal adequately with a range of macroeconomic imbalances, wrote in a research note dated Aug. 8 that "clear signs" have emerged that the property boom has come to an end and prices in all three Baltic states are starting to fall.
While admitting that it is difficult assessing the Baltic property markets since statistics are "fairly unreliable and hard to compare from country to country," Danske Bank analysts maintain that prices have peaked and are inexorably declining.

"It is very difficult to assess how far property prices in the Baltics could potentially fall, but given the large imbalances in the Baltic economies we think the downturn could be quite severe and long-lasting," the bank's chief analyst, Lars Christensen, said, adding that the extent of the fall would depend upon macroeconomic indicators and investor expectations.
The report is another warning sign for the Baltic economies, two of which are in double-digit GDP expansion and risk a hard-landing scenario with growth plummeting to near zero territory. The Bank of Latvia has admitted that the Latvian economy, which grew at an annual rate of 11.3 percent in the second quarter, is overheating. (See story on Page 12.)

Christensen cites three broad reasons why Baltic property prices are in reverse. First, prices have been divorced from fundamentals and risen far too high. Second, a number of "negative shocks" have affected the market, including a rise in interest rates in line with European rates.
Third, lending institutions have tightened criteria for consumers, particularly in Latvia, "on the back of rising concerns about the large imbalances in all three countries."
"Anecdotal evidence clearly indicates that a lot of the property investments in the Baltics have been highly speculative, which is of course a worry," wrote Danske Bank.
Real estate agencies said they did not agree with the report. Andris Dovieks, marketing manager at Ober-Haus, the largest real estate agency in the Baltics, said that the report "looks like a commentary from far away."

"It's true that prices are not growing and have fallen a little bit, but this is a correction," he said, adding that overall property prices may fall 5 percent.
Looking ahead to the end of the year, Dovieks said that stabilization will come in October, which Ober-Haus agents are referring to as "a milestone" for the property market.
As he explained, consumers have become more discriminating in the past year and are pickier about the property they choose. Newly built residences are in, and older Soviet-era apartments are out, Dovieks said.
"There won't be a crash 's there may be another 2 - 3 percent fall in prices, but we say this is a correction after a period of large growth," he said.

Prices for the hot commodity in the industry 's new apartments 's have stopped growing not because of a drop in demand but because of finance: banks have become stricter in processing loans.
Still, the specter of a major correction looms over the market. A Postimees headline on Aug. 14 boldly announced that Tallinn apartments have become 10 percent cheaper.
The paper quoted Pindi Kinnisvara as saying that supply has doubled over the year and the situation now resembles a buyers' market. Other sources say Estonian banks have also become stricter in handing out loans and the loans themselves are more expensive.

Danske Bank declined to characterize the Baltic real estate market as an "asset bubble."
"But there is no doubt in our view that property price growth has been excessive, and therefore property prices should be expected to slide further going forward," Christensen said.
"The conclusion is that a slowdown is now underway in the Baltic property and construction markets. This will undoubtedly contribute to slowing down economic growth 's potentially a lot 's in all three Baltic countries. The question still remains, however, how severe the decline in the property markets will be," the bank wrote.