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Housing affordability in the Estonian capital Tallinn improved slightly in 2018, as rapid net wage growth outpaced average apartment price growth and interest rate growth. However, during the last five years, housing affordability in Tallinn has remained roughly at the same level. Average apartment price growth in Tallinn moderated to 5% in 2018, while residents' net wage growth was two times higher at 10% on year. The rapid growth of the average wage can be ascribed to the shortage of labor, a hike in the minimum wage, and the income tax reform, Swedbank said.

Activity in the residential real estate market of Tallinn decreased by 0.5% year over year. The share of newly built apartments in total transactions has been constantly increasing over the past years, which also contributes to the growth of the average apartment transaction price. In 2018, the share of newly built apartments in total transactions was 29%. On average, newly built dwellings are about 30% more expensive than older apartments.

Households' confidence in purchasing or building a home within the next 12 months fell sharply in the fourth quarter. However, this fall seems to be temporary as in the first quarter of this year confidence has slightly increased again. The reason behind this cautiousness of households may have come from increased media coverage of such topics as a possible economic crisis and rise in interest rates.

Swedbank said that it does not expect an economic crisis in its outlook main scenarios, and it also expects the rise in interest rates to be slow.

In 2018, the number of building permits issued for dwellings was 30% lower due to the base effect from 2017, when the growth of building permits was very rapid, reaching 68%. Last year, 18% more dwellings were built in Tallinn than a year earlier.

According to Swedbank, housing supply in Tallinn is still in a good balance with demand. This year, Swedbank expects slower net wage growth, while price growth will stay at around the same level as last year or somewhat lower and mortgage interest rates will remain at the same level or slightly increase. Thus, in 2019, housing affordability in Tallinn should stay at around the same level as in 2018.

When it comes to the Latvian capital Riga, the index improved considerably in 2018, including for new-project and renovated apartments, though the affordability level is lower for these apartments. Rapid average net wage growth, which outpaced the average apartment transaction price growth, was the defining factor behind higher affordability. The tightening labor market, labor tax reform, and minimum wage hike were the main reasons explaining the rapid growth. A minor decrease in mortgage interest rates also contributed to the improvement in the index.

In 2019, Swedbank expects that the index for Riga, including for new-project and renovated apartments, will continue to improve, albeit in a slower pace. Wage growth is expected to slow as the effect from the labor tax reform and minimum wage hike dissipate, but the average apartment price will likely sustain a similar growth rate as in 2018. Interest rates are expected to stay at a similar level as in 2018 because they are already at historically low levels. Thus, interest rates will likely have a largely neutral effect on affordability.

Supply and demand in the Vilnius residential real estate market seem to have been balanced overall. Prices inched up only 0.5% annually in the final quarter of the year. On the other hand, the number of transactions was up nearly 10%. The year 2018, overall, was very active for the Vilnius housing market, with a record-breaking 11,085 transactions surpassing the previous peak of 2007. Prices of new apartments declined 1.5% in the fourth quarter due to the large supply of freshly built apartments and, perhaps, a larger share of transactions in cheaper market segments.

Swedbank said that while rapidly rising incomes and record-high consumer confidence are likely to keep the real estate market of Vilnius active in the nearest future, it does not expect a sharp appreciation in apartment prices.