Baltic, Covid-19, Financial Services, Real Estate

International Internet Magazine. Baltic States news & analytics Friday, 29.03.2024, 01:37

Number of transactions in secondary housing market dropped considerably in Baltics in Q2

BC, Riga/Vilnius/Tallinn, 17.09.2020.Print version
There was a drop in the number of transactions in the secondary housing market in the Baltic states in the second quarter of 2020, resulting in new apartments gaining a bigger market share, said Swedbank, resulting data from the latest Baltic Housing Affordability Index, informs LETA.

"During the second quarter of 2020, the Baltic economies, like the rest of the world, were hit by the corona crisis. In the housing markets of the Baltic capitals, it was the secondary market that bore the brunt of pandemic damage," the bank said.


In Riga, the transaction volume of Soviet-era apartments fell by 43% annually in the second quarter of 2020. The fall of sales in the secondary market was mostly due to the market’s higher sensitivity to macroeconomic conditions. People were more cautious about their financial stability and less eager to take on new liabilities. On the other hand, new apartment transactions depend on previously signed agreements, and this side of the market therefore exhibited some inertia. 


In Riga, consumer behavior was rather similar to the other Baltic capitals; however, housing affordability improved slightly in the second quarter of 2020. Average apartment price growth slowed to only 1% in that period, but wage growth moderated less, resulting in improved affordability. The new-project and renovated apartments maintained a price growth of 7% on average. The older apartments became the first victims of COVID-19, as the prevailing uncertainty resulted in a drop in prices and the number of transactions in the secondary market.




The pandemic and the ensuing economic crisis in Tallinn had an immediate demand shock on the housing market. In the second quarter, when the housing market was hit the hardest by the virus containment measures, the number of transactions were down by one-third. However, during the summer months, demand has somewhat improved from the bottom of April. Nevertheless, the number of transactions is still below the levels of a year ago, and the recovery of demand has recently stalled (see graph in the Appendix page 7). Despite the reduced demand, prices have been rather resilient, and housing remained affordable. In the second quarter, net wages grew 3.6%, and the average price of apartments in the capital was 8% higher than the same time a year ago. However, the strong price growth was mostly due to the changing market structure. As the purchase of an apartment in the secondary market is rather a short process, with low initial costs, it was easier to drop or to postpone a transaction. At the same time, preliminary agreements with new apartments were mostly concluded prior to the pandemic, and violating the contract meant high costs. This motivated the buyers to sign purchasing agreements after the completion of a building, unless the buyers were facing a loss of income and were forced to back out. As a result, in the second quarter, the apartment market saw a shift towards a larger share of newly built apartments (36%), which were on average 33% more expensive than secondary market apartments. Thus, the average price no longer represented the usual structure of the housing market, and the drop in housing affordability was due to these statistical changes. In the first half of this year, there were 8% more dwellings completed than at the same time a year ago. The last time the number of completed dwellings was that high was at the beginning of 2008. There were 2% more building permits issued in the first half of the year than a year earlier. The stock of new apartments in Tallinn and neighboring parishes slightly increased annually in the second quarter. Many of the planned new developments that were on hold since the state of emergency have been relaunched in recent months. After the end of the emergency situation, household savings have continued to grow fast due to the limited possibility to spend and the higher uncertainty, which has made it possible to collect buffers for more difficult times. However, the distribution of savings is uneven. Although general economic confidence has recovered since the end of the emergency situation, household confidence did not improve during the summer. Unemployment is expected to rise somewhat in the second half of the year, and we expect wage growth to slow. This, in turn, will hamper the recovery of housing demand this year. Interest rates will remain low for a long time, and lending conditions will thus remain favorable. The pandemic has damaged the fragile balance between supply and demand. While the price growth of newly built apartments has continued, prices on the secondary market have been more sensitive due to the more dramatic fall in transactions. Because of the lower demand, prices of apartments in the older segment may fall slightly by the end of the year. At the same time, we believe that the price drops will be modest and short-lived, as the housing market was developing sustainably before the corona crisis and real estate prices have been growing in line with wage growth. The strong financial position of both developers and households means that significant discounts are unlikely. According to preliminary data, the average price growth was 3.3% in the first two months of the third quarter.


Not completely unexpectedly, the housing market in Vilnius showed some unusual behaviour. Housing affordability declined quite substantially in the second quarter to 131.1 – the sharpest annual decline in a decade. Housing prices are soaring, despite the pandemic while at the same time transaction volumes had fallen. It is quite bizarre to see over 19% annual apartment price growth in Vilnius, given the current macroeconomic environment. However, the explanation lies in the structure of sales. Buying a newly built apartment carries a lot of commitment - it takes a longer time, reservation fees are involved, etc. Therefore, due to the significant sunk costs, people are unwilling to drop their commitment to buy an apartment if the economic outlook suddenly changes, unless they absolutely must. Also, these deals are officially registered long after the actual sales take place. Buying an old apartment, on the other hand, is a shorter process with lower sunk costs; it therefore is much more responsive to the economic environment. And that’s exactly what happened in Vilnius: sales of old apartments shrank by nearly 46% compared with a year ago, shifting the structure of sales significantly towards the more expensive new apartments. To be fair, new apartments did appreciate even more annually than the average, due to a combination of strong momentum and carryovers (furthermore, the share of deals in the premium segment may have been larger, pushing up the average price). The price growth will decelerate significantly over the next two quarters as the technical factors wane.






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