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Lithuania’s real estate market hints of troubles ahead

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RULinas Jegelevičius for the BNN

Although the new flat sales, including luxury sector, in Lithuanian capital Vilnius continue to hover at the peak of recent years, real estate market outside the capital and Kaunas, the second-largest Lithuanian city, is cooling off, which may be an omen as to what expect soon.

«In 2017, we definitely saw fewer sales in the country’s largest resort Palanga, which is the reflection of health of the market. The buyers were less eager to invest in a second unit of housing (in the resort), a result of apprehensions over the prospects of the short-term future of the market and the economy on the whole,» an real estate broker who spoke on the condition of anonymity told BNN.«What is happening is not seasonal fluctuations but definite signs of a new downturn.»

Lithuania’s real estate market traditionally slowed down in November from October, with the decline reported in all segments. Nevertheless, more real estate units changed hands in November year-on-year, the Centre of Lithuanian Registers reported.

According to preliminary figures, nearly 10,600 buildings, premises and land sites changed hands in sales deals in November, which is a drop by 3.2 percent, from 10,900, in October but a rise by 5.2 percent, from 10,100, in November of 2016.

Although some of the drops can be chalked off to seasonal fluctuations, Tomas Garbaravičius, a member of the Board of Bank of Lithuania, admitted that, in the larger picture, cooling off of market was indeed palpable.

«The prices do not go up rapidly (as they used to in year before) and expectations are lower now. However, real estate market is still hot, mostly due to high acquisitions of secondary accommodations which are used for rent or resale,» he said to Lithuanian media this week.

In his words, expectations of high real estate prices have seen a major blow at the end of the year.

«I’d call it a healthy slowdown, nevertheless. According to the Statistics, the growth of prices during the year’s first and second quarters averaged at 10 percent, which, to be frank, made me uneasy. If it had remained at the level, it would have sent us a distress call, however the rise of prices slowed down,» the Board member accentuated.

He also noted that, in recent 20 years, the pace of flat price growth was just a little slower than that of salaries. The indicator is used by central banks to assess possible risks for an economy.

«In that regard, the situation in Lithuania is pretty good,» Garbaravičius emphasised.

Statistically, Vilnius dwellers allot slightly over 30 per cent of their income to pay mortgage, with the average in Europe being between 15 and 25 per cent.

The Central Bank‘s official also referred to a survey by the Bank, suggesting that more respondents than ever believe that now is a better time to sell lodging than buy it.

«Interestingly, survey participants with higher income tend to think so,» Garbaravičius noted.

Yet the supply of real estate units is vigorous and, importantly, the number of sold flats remains higher than before 2008 downturn.

«In fact, we are seeing a record supply of available flats. If the market remains so vibrant, the supply will likely be absorbed (by the demand),» the banker predicted.

Unlike others, Vilnius inhabitants prefer flats.

The mood of real estate buyers was different in Kaunas, however, where survey respondents believed that the supply of new housing will rise faster than the demand.

In recent years, various Lithuanian regions or cities have been recording significantly different qualitative and quantitative changes in housing supply and demand.

«While some cities see a rapid growth in supply and demand for new housing, other cities show marginal changes or none at all. Analysis of the housing markets of the country’s three major cities also illustrates that they are in totally different stages of development. One reliable housing market indicator can be the development of more expensive housing and, definitely, demand for it,» Raimondas Reginis, senior market analyst of Ober-Haus, a major real estate seller, told BNN.

A survey on expensive housing in Vilnius carried out by Ober-Haus has shown that, in recent years, Vilnius has recorded a stable increase in the demand for the most expensive apartments; i.e. every half-year recorded an increasingly higher number of such property transactions as well as increasing amounts of money spent on the acquisition of such assets.

However, in 2017, Kaunas also recorded a particularly steep rise in the sales of more expensive apartments.

While only 12 such apartments where the price per square metre exceeded 1,800 euro were purchased in Kaunas in 2016, in the first half of 2017, 39 such apartments were purchased.

Meanwhile, Klaipeda, the country’s third-largest city, saw decline in most RE segments in 2017.

The forecast by Sigitas Besagirskas, a prominent Lithuanian economist and President of Vilnius’ Industry and Business Association (VPVA), also bids nothing good as the analyst points to an inevitable descent from the peak.

«The only question is whether it will be soft or hard, as in 2008,» he told BNN. «What we are obviously seeing today is a ballooning bubble in the sector of real estate. Worrisomely, it is clear in Scandinavia, which sets trends for the entire Baltic region, due to the heavy presence of Scandinavian banks in it.»

In an attempt to rein in the bubble, the Scandinavian countries have already limited borrowing and have passed a set of measures in the regard. Swedbank and SEB banks were among the first to do it on their own, in fact.

«We indeed are very reliant on the Nordic countries, not only because of the heavy imprint of Scandinavian capital in the Baltic region, but also owing to the fact that Scandinavia is one of our key export markets.

If the Nordic banks decide to tighten borrowing further, it is inevitable that their Baltic branches will be told to do the same. Should it happen, it would further prompt shrinkage of the local real estate market. As domestic consumption–one of the economy’s key driving forces– reflects what is happening in it, the fallout will be a pace-picking decrease in the demand of goods, and certainly, real estate,» the analyst pointed out.

Speaking of Lithuanian real estate, he observed that house and flat prices were falling, and this is worrisome, although developers and realtors tend to talk about seasonal price corrections.

«As of date, there are quite a few unsold flats in Vilnius. I want to see how sales will be at the turn of the year. And especially in the spring, as they now are, more or less, affected by seasonal (price) fluctuations. If the demand for real estate remains tepid or continues to decrease, developers, distressed by failure to sell new units, and burdened with the obligation to pay back bank loans, will be forced to further slash the prices. With buyers waiting for the lowest price, the market will fall to stagnation. This is the worst scenario and it seems plausible,» Besagirskas predicted.

That the Central Bank of Lithuania has not weighed in on the real estate trends yet, although its governor Vitas Vasiliauskas has hinted at a shaping-up bubble in the real estate market, it is quite understandable, he says.

«The bank, as the banking system’s chief watchdog, does not want to ignite panic with hasty statements. However, it will have to address the issue sooner or later. And furthermore: tighten borrowing and consumption. The situation in Vilnius real estate is no different from that in the other two Baltic capitals, Riga and Tallinn,» the association head said.

In early September, Vitas Vasiliauskas, chairman of the board of the central Bank of Lithuania, said that Lithuania’s economy showed signs of over-heating; however, they were not of the extent they were during the economic boom before the latest financial crisis in 2008-2010.

«Yes, there are signs of overheating; however, they cannot be compared to what they were before the crisis, as the characteristics are different. Crediting is growing at a normal pace, public sector spending is under control, exports markets are indeed stable, changes in the euro exchange rate – they will not have an impact on the main exports market, as it is within the euro area. For now, I do not see reasons to predict a recession,» the bank chief said.

Ref: 020/111.111.111.5307


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