Analytics, Banks, Lithuania, Real Estate

“While adjusting to the pandemic-induced developments, the real estate and construction market has proved to be standing on a strong footing. Nonetheless, if such changes as the shift to remote work or e-commerce are set to become a new normal, some of its segments will have to address structural challenges,” said Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania. He also emphasised the most pressing long-term issues, such as the ageing population and the necessity to plan several steps ahead so as to be able to manage the evolving risks.

After the initial slowdown at the onset of the pandemic, the housing market has later staged a noticeable recovery, while towards autumn its activity already soared to historical highs. New apartment sales have reached record levels and the stock of unsold apartments in the capital’s new housing market – the largest in the country – has set on a downward path. In October, new apartment sales in Vilnius exceeded the average level of the past two years by more than 50%. Stronger activity has triggered a decline in the inventory of unsold apartments, which in late September contracted by one-sixth y-o-y. The Bank of Lithuania economists estimate that such developments are sustainable – this assessment is based on the fact that housing remains affordable. With growth in household income outpacing house prices, it is getting easier to purchase a residential property. For instance, a typical household can now acquire a mid-sized apartment in Lithuania for its three years’ wage, whereas five years ago such a purchase would nearly eat up its four years’ income. Moreover, the Responsible Lending Regulations effectively stave off a bubble in the housing loan market, and the proportion of mortgaged house purchases is now much smaller than before the global financial crisis of 2009.

According to Vitas Vasiliauskas, the Bank of Lithuania is closely following not only developments on the national scale, but also market dynamics in separate towns and regions.  

 “If any regional housing market imbalances emerge, we will not hesitate to take additional steps. For example, if necessary, we may adjust the application of the Responsible Lending Regulations for the acquisition of real estate registered in a certain area,” said Mr Vasiliauskas.

He also noted that next year the transposition of the revised Capital Requirements Directive into the national law would complement the Bank of Lithuania’s regulatory toolbox with a possibility to impose additional sectoral capital requirements on commercial banks. This would allow increasing capital requirements for separate segments, e.g. to purchase housing registered in a certain city or town.

The array of risks has been widening in both the housing and, particularly, the commercial real estate market. The pandemic has not yet been contained and the real scale of its economic fallout will only become visible through the rate of bankruptcies among the most affected businesses as well as the rate of decline in household income. It is therefore necessary to duly assess the risks taken and build up sufficient buffers for inevitable contingencies in order to adequately adapt to the changing situation in the real estate market.

The commercial real estate market faced significant uncertainty even before the second lockdown. The shift to remote work in the private and public sectors has triggered a substantial increase in the office vacancy rate, which is expected to grow further in Vilnius next year.

The risks that have built up before the pandemic, first and foremost – the demographic situation – have not disappeared, either. Lithuania’s population is ageing, despite noticeable improvements in the country’s migratory balance. The European Commission’s estimates show that the share of people aged between 18 and 35 in the country’s population will decrease by approximately one-fifth in a decade’s time. If demographic trends remain intact, this will inevitably have significant consequences both for the real estate market and the entire Lithuanian economy.

Creditors have also taken a more cautious stance towards the outlook of the real estate market. Banks have tightened their creditworthiness criteria and down payment requirements since the beginning of the pandemic, and the real estate sector companies now have lower access to finance than last year. However, such a situation is somewhat offset by intensifying competition driven by alternative credit sources. Increased competition has accelerated credit recovery and put a squeeze on loan interest margins, despite the pandemic-induced uncertainty. Businesses, meanwhile, increasingly tap funds from other companies and non‑bank financial institutions.

On 24 November 2020, the Bank of Lithuania held its 8th Annual Real Estate Conference. The central bank devotes significant attention to the real estate and construction market, which creates more than one-tenth of the country’s GDP. Housing loans, worth approximately €9 billion, account for nearly 50%, while loans secured on commercial real estate, worth nearly €6 billion – for 30% of the overall private sector loan portfolio. Therefore, the real estate sector also has a significant indirect impact on the stability of the financial system as a whole.