2024-07-11 02:25:14
The European Central Bank (ECB) started raising the base interest rates exactly two years ago – in the summer of 2022. Euribor, the interbank interest rate dependent on the ECB’s monetary policy, rose to more than 4 percent.
Both the rapid rise in housing prices at the beginning of this decade (from the beginning of the 2020s until now, the average price of a square meter of an apartment has increased by more than 1,000 euros) and increased interest rates have greatly reduced the ability of residents to purchase housing.
The affordability index calculated by Swedbank shows that a middle-income family in Vilnius could buy an apartment of approximately 80 square meters three years ago. Currently, such a family can buy only about 50 square meters without incurring excessive financial obligations. m. average price apartment.
The consequences of reduced affordability were soon reflected in transaction statistics – currently, apartments in Vilnius are being sold at the lowest rate in the last eight years and about a quarter less than at the peak in 2022.
First home buyers remained quite active in the market, but were often forced to choose a smaller home. However, the number of transactions fell mainly due to the extremely thin ranks of investment housing buyers.
However, despite the greatly reduced demand, housing prices did not fall. The price index of recurring transactions calculated by the Bank of Lithuania shows that currently apartments in Vilnius are 3.4 percent, Kaunas 3.7 percent, and Klaipėda 6.5 percent. more expensive than a year ago. What led to such price trends – unexpected by many?
This was mostly due to positive trends in the labor market – low unemployment and rapidly growing wages, but there were other important reasons as well.
One of the reasons why we haven’t seen a decline in house prices is the sales strategy chosen by many developers, which is to offer added value rather than a price discount. Storage, parking spaces, free finishes and other more exotic additions meant that while the price per square meter did not decrease, the benefit the buyer received for the same price in many cases increased.
In contrast to the previous decade, demographic trends were also favorable to the housing market. In all major cities of Lithuania, the population has been increasing in recent years – mainly due to external immigration, but also due to migration within the country. In Vilnius alone, the population has been increasing for the past 6 years in a row.
Recently, we have seen a large immigration from non-EU countries, but Lithuanians returning from emigration for several years and more than those leaving.
The resilience of the housing market was also contributed to by the fact that the opportunities to borrow did not decrease, and mortgage loan margins also decreased by almost a percentage point. Moreover, neither home sellers nor buyers expected interest rates to remain at such high levels for very long.
The ECB has already cut the base interest rates by a quarter of a percentage point and is likely to cut them by another half a percentage point this year. It seems that the decisions of both buyers and sellers are driven not only by current interest rates, but also by the (improving) longer-term outlook.
Analyzing the long-term experience of many countries, it can be summarized that a deep and long housing depreciation is a rare and highly undesirable phenomenon. It is usually accompanied by a fall in real estate prices
high unemployment, declining incomes and other wide-ranging economic and financial problems.
So far, there are no such problems in Lithuania – population employment remains close to record highs, average wage growth is still around 10 percent, the volume of industry and retail trade has started to grow again this year, and many real estate developers do not have financial problems that would cause them to rush to liquidate assets. at any cost.
However, despite the improving economic outlook, we see that the number of unsold apartments in the primary market is still increasing. The number of unsold apartments in Vilnius exceeded 5,000 this year and is close to record highs. This means that the bargaining power is currently in the hands of buyers, and there are not many prerequisites for rapid price growth.
So, in summary, the scenario of a significant decrease in the price of apartments remains unlikely and not very desirable. The best potential homebuyers can hope for is stable or slowly rising house prices, with wage growth outpacing their rise. This is the most likely scenario in the coming years.
2024-07-11 02:25:14