Analytics, Baltic, Covid-19, Financial Services, Real Estate, Wages

In Tallinn, price growth accelerated over the year to 8.3%. The growth was driven by the large share of newly built apartments and the completion of developments in the luxury apartments segment. In February, the growth in activity was very strong: the number of transactions rose by 19% annually. However, a sharp decline in the second half of March dragged volumes of the first quarter to -1% over the year. According to preliminary data, the number of transactions decreased by 43% in April and 36% in May annually. Despite the sharp decline in housing demand, the average price growth is driven by the completion of new developments. 

In Riga, price growth slowed down a bit over the year and reached 5.4%. That was due to diminishing price growth of older Soviet-era apartments that still dominate the market. The price growth of the new-project and renovated apartments outside the city centre was 9%. The drop of transactions (mainly secondary market) occurred in April and May, while transactions with new apartments still took place upon the previously made agreements. 

In Vilnius, for the first time volumes of new development sales were larger than those of old apartments. The first two months of the year were uncharacteristically active. These two factors meant that apartments were appreciating at the average rate of 12% in the first quarter, despite quarantine starting in mid-March. Even though housing market was completely frozen for the last couple of weeks of the quarter, transaction volume increased by 11.5 % annually.

In the beginning of 2020, net wage growth in Vilnius and Riga moderated to 9.2% and 5.5%, respectively, compared with the previous year, while in Tallinn it slightly accelerated to 6%. Net wage growth eased in Vilnius as the boost from the tax reform faded; however, the underlying earnings gains strengthened even further, especially in the private sector. 

In Riga, wage growth remained rather strong, with moderation in the first quarter led by the private sector. In Tallinn, wage growth was supported by rapid wage growth for the IT sector and other professionals with high qualifications, most of whom are concentrated in the capital. The first quarter showed only the first signs of the pandemic’s impact on the labour market in the Baltics – many workers were furloughed, and unemployment started rising. Deteriorating labour market conditions will stop the rapid wage growth across the Baltics. However, an outright contraction is unlikely, since the public sector wages are not expected to be cut: in some cases, private sector raises were already locked in, and, e.g., in Estonia and Lithuania the minimum wage was increased. 

Overall, we are more likely to see a reduction in working hours and employment rather than straight-up wage cuts. Furthermore, the average wage level will be propped up because it is the low-wage sectors experiencing the largest layoffs. In the first quarter, the number of months needed to save for a down payment, which equals 15% of an apartment price, increased in Vilnius and Tallinn; it did not change in Riga. In Tallinn, it was 29 months. In Riga, it was 23.7 months (35.2 months for new-project and renovated apartments). In Vilnius, it was 32.5 months.

It is too early to evaluate the development of housing market and housing affordability in 2020, as the effect on housing prices will be delayed. Transactions with newly built apartments are reflected in data with a significant lag from the time of signing the purchase agreement; this will help maintain the upward price momentum in data for some time. The much healthier household and corporate finances than 12 years ago mean both the households and corporates have the luxury to play the waiting game. Few potential sellers are so financially distressed to dump flats at a significant discount; however, some cases of discount selling might appear as the recovery is expected to be slow, with some sectors suffering for a prolonged period. Developers are postponing construction in reaction to the worsening outlook. The only area where price correction is already under way is the rental market, especially in prime locations, as apartments used for short-term rent for tourists have relocated to the long-term market. It remains to be seen if contagion will spread. 

Contrary to 12 years ago, the housing market in the Baltics is developing in a sustainable manner. Housing was not overvalued; affordability was at a record high. Of course, given the severity of the economic shock, some downward correction in real estate prices is expected, although much less severe. Overall, we expect housing prices to fall up to 10% by the end of the year and start growing again in 2021. The housing market will be affected through both – the impact on demand and supply. While, in the beginning of the quarantine, purchases were delayed mainly due to imposed restrictions, as well as heightened uncertainty, the deteriorating financial situation and weak consumer confidence means that many households will refrain from buying homes further ahead as well.