Latvian Property Market Losing Steam

The Latvian real estate recovery that began in 2010 following the global financial crisis seems to be losing momentum, according to data provided by Ober Haus. House price …

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The Latvian real estate recovery that began in 2010 following the global financial crisis seems to be losing momentum, according to data provided by Ober Haus. House price increases in Riga dropped to under 1% in 2012 when adjusted for inflation and the total number of completed new houses dropped 11% by the third quarter of the year. Some experts blame the boom and bust on Russian speculators known to snap up land across the country, but disparities between supply and demand are also known to have caused problems; however, a strengthening GDP and improved employment rates may help in 2013. For more on this continue reading the following article from Global Property Guide

The average price of apartments in Riga rose by 2.06% to LVL693 (€989) per square metre (sq. m.) during 2012, the lowest year-on-year increase since May 2010, according to Ober Haus. Adjusted for inflation property prices rose just 0.48%.  During the latest quarter, average Riga apartment prices were unchanged.

Arco Real Estate’s data supports this, showing Riga house prices up 2.06% (0.54% in real terms) during the year to November 2012. During the latest quarter, house prices were again unchanged.

After several years of double-digit property price increases, the Latvian housing market started to weaken in 2007.

  • In 2007, house prices dropped by 5.01% (-16.71% in real terms) from a year earlier.
  • In 2008, house prices plummeted by 30.47% (-37.11% in real terms) y-o-y
  • In 2009, property prices plunged by another 42.02% (-41.34% in real terms)

Then in 2010, the housing market started to recover with house prices rising by 5.05% (2.49% in real terms), rising another 5.79% in 2011 (1.65% in real terms). But prices were still 63.3% lower than at the July 2007 peak, according to Arco Real Estate.

In 2013, economic growth is projected to be 3%.  After a deep recession lasting three years (GDP -3.3% in 2008, -17.7% in 2009, and -0.34% in 2010), the Latvian economy recovered and experienced real GDP growth of 5.5% in 2011, and 5% in 2012.

The total number of completed new dwellings dropped by 11% in the first three quarters of 2012 from the same period last year, according to the Central Statistical Bureau of Latvia (CSB).

Housing loans are falling. In December 2012, total loans for house purchase dropped by 11% to LVL3.75 billion (€5.35 billion) from the same period last year, according to the Bank of Latvia.

The average interest rate for house purchase loans denominated in lats was 3.2% in December 2012, up from 3.1% in the previous month, according to the Bank of Latvia. On the other hand, the average interest rate for house purchase loans denominated in foreign currencies was 3.4% in December 2012, up from 3.1% in the previous month.

Real estate investment in Latvia confers residency status.  A foreigner can receive permanent residency in Latvia (according to the Baltic Legal):

  • if a person invests LVL50,000–LVL100,000 in real estate, depending on the size of the town (LVL 100,000 in the Riga Planning Region, Jelgava, Daugavpils, Jekabpils, Liepaja, Rezekne, Valmiera or Ventspils; LVL 50,000 in other areas);
  • if a person invests at least LVL 200,000 in a Latvian credit institution in the form of subordinated capital (such transaction must be for not less than five years);
  • if a person invests LVL 25,000 in the equity capital of a company to be registered in Latvia, following this up with a payment of at least LVL 20,000 in one year’s time.

Its those Russian speculators!

Foreigners, mostly Russians, have been reported to be snapping up tracts of land and unfinished real estate developments. With prices at one-third of peak values, residential properties in Latvia seem a bargain. Transaction volumes have been steadily rising since late 2009.

Property speculation have played a huge role in Latvia before. Surveys suggest that speculators bought around 15% to 30% of all properties during the house price boom.

From 2004 to 2007, property prices doubled, tripled or even quadrupled:

  • The national average price of dwellings in Latvia rose 311% (228% in real terms) from LVL148 (€210) per sq. m. in 2004 to LVL862 (€529) per sq. m. in 2007, according to the Central Statistical Bureau (CSB).
  • In Riga average prices rose 267% (193% in inflation-adjusted terms) from LVL229 to LVL841 per sq. m. (from €325 to €1,193) over the same period.
  • All regions registered remarkable price increases. The average property price rose by around 300% (220% in real terms) from 2004 to 2007 in the regions of Vidzeme and Kurzeme and Zemgale.
  • The average dwelling price rose least in the Latgale region south-eastern Latvia, up 211% over the same period.

Pent-up demand

The immense house price boom was also due to a significant mismatch between supply and demand.

Before independence, more than 10,000 apartments were completed annually. After independence the number of dwelling completions dropped to below 2,000 units between 1995 and 1999, and to less than 1,000 between 2000 and 2003.

It was only in 2004 that housing construction began to pick up. Dwellings completed increased significantly to and peaked at 9,319 units in 2007.

The massive demand for properties was clear; owner occupancy has risen dramatically, from 21% in 1990 to 87% in 2006. However the sudden increase in supply flooded the market, pushing prices down.

Units started in 2006 and 2007 are still being completed. The overhang continues to pile up. New developments had practically disappeared. Yet oversupply continues to mount with dwelling completed at 8,084 in 2008 and 4,160 in 2009.

Rapid mortgage market growth

The rapid expansion of Latvia’s mortgage market was a key factor, propelled by low interest rates and the entry of foreign banks. The pace of growth was amazing – housing loans outstanding expanded by almost 90% annually from 2004 to 2006. Despite early signs of trouble in 2007, the mortgage market nevertheless grew 44% during that year. Total mortgage debt rose from 2% of GDP in 2000, to 33.75% of GDP in 2007.

It was not until 2008 that mortgage market growth grinded to a halt; down to 7.3% in 2008 before contracting 4.5% in 2009. With the economy contracting faster, the ratio of housing loans still rose to 36.5% of GDP.

Rental yields

Latvia’s rental market is still suffering. In the past, rapid property appreciation pushed rental yields down. In August 2009, most apartments in Riga earn yields ranging from 3.7% to 4.5% with the smallest units (around 45 sq. m.) earning the highest yield.

Apartments within the suburbs of Riga earn slightly higher yields, ranging from 4.7% to 5.9%, according to Global Property Guide data.

The recent housing glut and the precipitous drop in house prices has forced a lot of households to rent out units they originally intended to sell. But the number of potential tenants has contracted due to the economic recession.

Recent house price and rent movements point to a continued drop in rental yields. While property prices rose in Q1 2010, average rents were generally stagnant from the previous quarter, according to data from Ober-Haus.

In Q4 2009, the rents in Riga’s Exclusive Centre dropped by 35% to 40% from the previous quarter. While in the Old Riga Center, rents fell by 12% to 30% within the same period.

The Latvian crisis reminisced

The Latvian crisis began with the economy expanding by an average of 8.5% from 2000 to 2007, and during this period property prices rose by almost 700%. However, inflation rose from 2.5% between 1999 and 2003, to over 10% in 2007.

By the second half of 2007, the housing bubble had burst. Demand plunged. House prices plummeted. The Latvian economy almost collapsed, with real GDP declining by 3.3% in 2008, by 17.7% in 2009, and by 0.34% in 2010.

By early 2008, the boom was over. The country’s fiscal deficit was shooting up. Capital was leaving the country. Exports were falling. Domestic demand was collapsing. By 2009, Latvia was close to economic collapse. The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.2% in 2007 to 19% in 2010.

Latvia’s currency peg meant the Bank of Latvia could not raise interest rates to tame inflation. Instead, when the crisis hit, the authorities resorted to a scorched-earth internal devaluation: access to credit was limited, taxes raised, wages were reduced and government spending cut.

In 2008, Latvia was able to secure a €7.5 billion standby loan from a group lead by the European Union (EU) and the International Monetary Fund (IMF), coupled with rigid austerity measures. The bailout prevented total economic collapse. More than €3.3 billion of the funds were used to pay public sector wages and maintain essential services.

Impressive economic growth

The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.2% in 2007 to 18.7% in 2010.

Latvia bounced back strongly in 2011, with real GDP growth of 5.5%. Latvia’s recovery was mainly driven by exports and an improving business and investment climate. Exports grew by 33% in 2011. The IMF has hailed Latvia’s cost-cutting efforts as a model for indebted eurozone countries as a way of averting economic meltdown.

The economy was estimated to have expanded by 5% in 2012, one of the highest in the European Union (EU), according to the European Commission. In 2013, the economy is expected to expand by 3%, according to the Bank of Latvia.

In December 2012, the registered unemployment rate in Latvia fell to 10.5%, according to the State Employment Service. Riga Region has the lowest unemployment rate of 6.8% while Latgale has the highest, at 21.1%.

The Bank of Latvia (Latvijas Banka), the country’s central bank, kept the benchmark refinancing rate at 2.5%, as inflationary pressures eased.

The country’s overall inflation rate was 1.6% in December 2012, the lowest level since November 2010, according to the Central Statistical Bureau of Latvia (CSB).

This article was republished with permission from Global Property Guide.

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