| According
to the Royal Institution of Chartered Surveyors’ European house price inflation
league, Estonia has enjoyed the most significant gains in underlying property
price for the last two years in a row. Much has been made of this
fact in the media and many interested buyers have been hunting around for
information about the types of property they should be buying and the most
ideal locations for purchase - but it’s actually quite disconcerting that
so much attention has been given to the fact that Estonia has been at the
top of the league with focus seemingly solely centred on the huge rate
of growth witnessed in property prices.
Why has so
little attention been given to the reasons behind the rapid and dramatic
rate of property price inflation in Estonia? Surely understanding
the factors driving the market is actually key to answering the question
on everyone’s lips – namely ‘will property prices in Estonia continue to
rise?’
If people looked
at why prices have been dramatically increasing they would be able to see
that Estonia probably witnessed the peak in terms of property market buying
and selling activity in the forth quarter of 2005 and that there will not
be a similar rise in house prices in 2007 as there was in 2005 or 2006
– that’s not to say that Estonia no longer represents a positive property
investment choice, it’s just that the goalposts have moved for investors
and they have to understand the state of the market today if they want
to succeed in realising profit from it.
The positive
and rapid economic development enjoyed by Estonia in recent years that
saw the nation head the streak of Baltic Tigers resulted in unemployment
falling dramatically and GDP increasing impressively – this meant that
almost overnight Estonian people became more affluent and more able to
afford to spend. At exactly the same time local banks began offering
low interest rate mortgages which were relatively easy to secure, and suddenly
a nation of people who had previously been housed in faceless, soulless
crowded communist accommodation were able to afford to buy their own home.
Demand for
property for sale in Tallinn and the main employment centres in Estonia
increased far faster than the rate at which developers could supply fresh
property stock; affordability within the consumer marketplace was increased
significantly thanks to the development of a healthy mortgage market, and
an incredibly favourable labour market situation resulted in rapid wage
growth allowing more consumers the ability to afford greater loan exposure
– as a result property price growth in Estonia began spiralling upwards.
But today the
entire situation has changed.
According
to the Bank of Estonia the nation’s economic growth rate has reached its
peak and will now slow down to a more sustainable 7 – 8%.
There is a
real risk in the banking sector that too much loan activity has been focused
on the real estate market through mortgages and loans to developers and
this may mean it becomes harder to secure property finance in the future.
Household debt
levels have reached an all time high in Estonia in relation to both GDP
and disposable income - and if interest rates increase this could seriously
undermine the financial situation of those households which have over exposed
themselves with loans and mortgages. In addition to this Estonian
people have no experience of dealing with long term loans, and any external
factors that affect their ability to afford their debts could have a seriously
negative effect on the property market. In the meantime public knowledge
relating to the fact that personal debt levels are increasing has already
reduced the appeal of the property market among local consumers.
Higher prices
for property in Estonia coupled with the completion and delivery to the
market of substantial property stock has halted the dramatic discrepancy
in the supply/demand ratio and also resulted in a cooling of domestic activity
in Estonia’s real estate market brought about by affordability constraints.
Additionally
construction activity could be negatively impacted in 2007 by higher land,
labour and material costs as well as a lack of qualified labour in certain
sectors of the construction industry in Estonia – these negative factors
could be passed on to the consumer through higher prices being asked for
property for sale which will again hit the affordability constraints already
in place and reduce construction activity as well.
What all this
means is that the entire investment property landscape in Estonia has changed
and a great deal of short term property market potential for speculators
seeking instant returns has gone from the real estate marketplace in Estonia
– but because the nation continues to be an affluent and economically successful
country attracting foreign direct investment in abundance and which has
a balanced state budget and a flourishing modern market economy, there
is continued and sustainable local and expatriate demand for housing –
both to buy and to rent - and it is this demand that underpins the fact
that there are property investment opportunities still to be had in Estonia.
Despite the
fact that freehold ownership of real estate in Estonia has only been possible
since the end of Soviet occupation, the property buying process in Estonia
is well established, straightforward and inexpensive.
More positive
features that help define the appeal of the investment property market
in Estonia are that mortgages are now available for foreign buyers, and
those who wish to own more than one property and who purchase through an
Estonian limited liability company can save significant tax on profits
and gains. |
