Taking Counsel: Has springtime arrived for the real estate market?

  • 2008-05-01
  • By Martin Mezinskis
As part of its anti-inflation plan last year, Latvia's government adopted specific measures directed at the real estate market and the tightening of the money supply available through mortgage loans. Amongst the measures introduced was the requirment of a minimum down payment of 10 percent for acquisition of real estate. This meant that purchasers were supposed to come up with at least their own deposit of not less than 10 percent. Financing banks were required to evaluate the creditworthiness of the borrowers as a matter of law, not just business. In addition, the measures required mortgage issuing banks to obtain from buyers a written confirmation issued by the State Revenue Service of legality of the buyers' income.

Such measures certainly had an impact. Many would argue that market forces had already tipped the scales in favor of a correction well before any anti-inflation measures were adopted, and that such measures not only did not "fight inflation" but had the effect of simply causing unnecessary harm to the real estate market itself.
This evidently was not lost on the president of the Bank of Latvia, Ilmars Rimsevics, who recently announced that the 10 percent mandatory down payment requirement would soon be lifted. While this news may be encouraging, will it mean anything to the market?

So far there are few indications that a significant recovery is just around the corner. Partly this is because in today's Latvia real estate prices are more sensitive to international influence that they were in the past, and the global real estate market has seen better times.

To the extent that domestic policy measures can be brought to bear upon domestic real estate market conditions, it is not clear that withdrawal of the 10 percent down payment requirement will be enough. Some would say that it is the requirement of the State Revenue Service's confirmation of legally acquired income that is having the most dramatic effect on the market.

The lifting of the 10 percent requirement should assist those in the market who have the ability to service regular monthly mortgage payments but who do not have 10 percent of the purchase price at their disposal for the down payment. On the other hand, it is an old adage in the lending business that "you can't carry what you can't lift" 's meaning if someone cannot save enough for the 10 percent down payment, they probably are not great candidates for meeting their monthly mortgage payments either. It would appear that it is not such a segment of the market upon which the hopes for recovery can be reasonably placed. 

In a recent interview Edgars Sins of Latio, one of the leading Latvian real estate companies, put forth the observation that a typical non-affluent working family that pays its taxes can afford to acquire an apartment for 500 lats (714 euros) per square meter. This is against the backdrop where, in Riga for example, at the height of the market the average price for an apartment was 1,300 's 1,400 lats per square meter. We are not down to the 500 lat per square meter range, and most hope that we do not reach it either.

The price of real estate on average has fallen by approximately 30 percent. That may be welcome news for those who did not manage to get into the market so far, but it is not particularly good news for anyone feeling a drop in value of their property they financed through a mortgage. Under these conditions, some credit institutions may choose to call the loans or require more security. The threat of a dramatic increase in bankruptcies is not remote.

Amendment to the law to lift the 10 percent down payment requirement is probably a good thing, not only because it is the lender 's and not the government 's who is best equipped to evaluate whether a lender should be granting a loan to a borrower and under what terms, but also because the measure was not particularly effective in any case. What is to be done is not however clear. Perhaps dropping the remainder of the anti-inflation measures directed at the real estate market and ceasing to intervene in the real market itself would be a wise decision as the market has a funny way of correcting itself rather well where it is not subjected to government intervention.

Martin Mezinskis is an associate at Kronbergs & Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder, Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.