It recalls the events of about 15 years ago, when the housing market was the central axis of the Latvian economy, the gravity of which kept the labor market, consumption and consumer prices, GDP dynamics and the balance of payments in orbit. It was talked about a lot at balls, funerals and business conferences. I wrote a lot about these events as a journalist at the time and received a lot of questions, recognition and criticism.
This year, the housing market has changed fast enough to say that after more than a decade of stagnation, the market is turning. The rise in property prices has accelerated. In several cities of Pieriga, the prices of standard-type apartments have increased by about a fifth since the beginning of the year. Mortgage lending is becoming more active, for example, in the first half of the year, Luminor Bank’s lending to households has almost tripled. Top new housing projects, the volume of issued building permits is growing. Increasing incomes are gradually increasing the proportion of families who are able to take out mortgages. Rising energy prices are encouraging both improvements to existing housing and access to modern living space.
The change in housing market trends will affect both the economy – GDP growth, the labor market and the quality of life of society and individuals. It will also influence strategies for building people’s private wealth. For many people, buying a home is the biggest investment of their lives. The answer to what to do or not to do in the housing market is always individual – people have different needs and opportunities, values and tastes. However, all decisions have a common “framework” for macroeconomic, technological and demographic processes. There are important truths for everyone that are worth knowing when making life’s most important decisions about building well-being and quality of life.
The foundation of a house is the economy
A home can be a profitable investment if it is bought at a reasonable price. Good news for potential buyers – prices in Latvia are low against the background of the Baltics and other countries in the region.
It is also important to know whether incomes will rise, as this is a precondition for rising house prices in the future. The preconditions for the development of the Latvian economy are currently favorable. This is not the main topic of the article, but to understand the big picture of the housing market, it is important to note the most important truths. The main driver of development is exports, which in 2020 compared to 2010 has increased by 66% in real terms, but since 2000: 4.1 times. There are favorable conditions for further development – the construction of new offices is growing in Riga, which is a precondition for the growth of the city’s most important export sector – business and IT services. The ability of regional cities to attract investment in industry is growing. In municipalities that implement smart development policies, the results are obvious.
Inflation is currently in the public spotlight, which is a serious problem. There is a risk that in the coming months, for the first time in 10 years, wage growth will not keep pace with price rises. However, it will be short-lived, from the spring of 2022 headline inflation will fall, but the rise in energy prices may turn out to be the opposite, as has happened in the past – last year gas and heat prices were lower than in 2012.
There are concerns that economic growth is at the expense of borrowing. Rather no than yes. Public debt has really risen during the pandemic. However, our economy is dominated by the private sector, and its financial balance sheet is at least as important. Thanks to the rapidly growing savings of families and companies and the growth of GDP, Latvia’s net external debt has decreased to 11.4% of GDP in the middle of 2021, compared to 57.8% of GDP at the end of 2009. Continuing in this way, Latvia will become a creditor of the rest of the world in a few years, which would be something unprecedented.
Home buyers may be concerned about the current population dynamics. This is an important fact and can be a serious argument against the purchase of housing in part of our country, but not in the most successful development centers.
Property is becoming more valuable
Investments in the Latvian housing market have been profitable since 2010. Housing prices have risen steadily, fortunately not so much as to worsen the purchasing power of housing. Rental prices have become more affordable from a consumer perspective.
You may be able to find even more profitable ways to invest. For example, long-term growth in stock markets tends to be faster than real estate prices on average over long periods of time. However, if it is taken into account that rental income or the benefit of not having to spend money on rent is higher than the return on equity market dividends, then the return on real estate and equity markets level off. In addition, the high level of stock prices at the moment should not be ignored, not all starting points in the market are equally profitable.
There is also no need to rush or drift hot. Events such as the rise in the prices of standard-type apartments in Jelgava by 24% this year, far exceeding the increase in wages, are likely to be an exception. Congratulations to those who took the opportunity to buy an apartment a year ago, there will be no such opportunity. However, in the long run, the set of prices in the market will be commensurate with the rise in wages, because there is no shortage of space for new housing in our country. The purchasing power of the Latvian population for housing, or the wage-to-price ratio, is one of the most favorable among post-socialist countries, but very similar to the Western European average.
Real estate is real estate
When buying a home in a city or county, people should consider the level of development of the area, the progress made so far in attracting investors and the quality of development policy. Latvia stands out with very low house prices (even in relation to wages) outside the capital region. In some places it is a good buying option, but not everywhere, you have to be careful.
The purchase of housing in areas with poor development prospects and not doing enough to change it should be treated with great caution. These trends cannot be changed by one person. They can be changed by the local community and government, recognizing what is at stake: resources invested in housing and related infrastructure may be lost if unfavorable trends continue. People leaving such places will be forced to start almost from scratch, as their current homes will not be able to sell profitably.
To prevent this from happening, efforts need to be focused on developing export-oriented industries where they have been weak so far, but good change is still possible. The study of Luminor regional economies shows the ability of cities and counties to earn from the sale of goods and services in the rest of Latvia and the world. An important remark from the point of view of home buyers – the survey does not reflect the income that residents earn from their work in other municipalities. Therefore, weak export capacity is not a big threat to Ogre or Saulkrasti, but in economically weak municipalities without strong development centers, the situation is worrying.
The price of insanity and the possibility of reason
The recovery of the housing market is now good news for the economy. This has not always been the case, there have been unhealthy fluctuations between extremes. Between 2003 and 2007, prices rose too much and sharply. The properties were bought at unreasonable prices, and buyers often suffered losses later on. The overheating of the housing market was a wrong priority for the economy, hampering the development of export sectors. In turn, since 2009, money has flowed out of Latvia through the housing market, repaying previously borrowed money to households. Although the household loan portfolio has been growing over the last few years, household savings are growing much faster. It strengthens family finances and delays external debt, thus improving future opportunities but also reducing economic activity today.
This means that the impact of the housing market on the well-being of many families has been negative. In the future, we can certainly make better use of the housing market as a driver of rapid but balanced growth.
Housing market participants are both competitors and partners. Not everyone can live in 10% or 50% of the most attractive housing, buyers are competing for this opportunity. However, both as buyers and citizens, we can make choices about the overall housing market value and the quality of the environment, making it more beautiful and comfortable. In general, the unattractive housing supply weakens Latvia’s competitiveness as a place to live. The increase in income generated and to be generated by the development of export industries makes it possible to remedy this shortcoming.
Housing policy is also an opportunity to play a part in tackling global challenges. The incorporation of forest-derived trees into buildings is one of the best ways to create negative greenhouse gas emissions or “remove” carbon dioxide from the atmosphere and store it for a long time, which will be further extended in the future by increasing the recycling of construction timber.
– .
