2019.04.15 08:25

Lithuanian housing market shows signs of overheating

Economists and real estate analysts agree that euphoria in the Lithuanian housing market reminds of the peak before the 2008 slump. Opinions vary, however, on whether buyers overpay for real estate, especially in Vilnius.

Taurimas Valys bought an apartment in late 2007. He says the family needed more space, so he took out a loan, even though home prices were going through the roof at the time. Soon afterwards, the global financial crisis reached Lithuania and his home value collapsed.

“Even now, they [home prices] have not bounced back to the level they were at the time,” Valys says.

His family paid €130,000 for the 60-square-metre apartment. The man had to refinance the loan recently and says his home is now valued at under €100,000.

Housing analysts say that the number of deals in the market has reached the pre-crisis peak. They estimate that Lithuanians spent €2 billion to purchase homes last year, the biggest sum since 2007.

However, Arnoldas Antanavičius, real estate market analyst and director of ReaData, warns that buyers tend to overpay.

“The ratio between people's income and housing prices is two times worse [in Lithuania] than in Western Europe and even in Vilnius, the ratio is one-fourth worse than in Riga or Tallinn,” Antanavičius tells LRT.

“That alone suggests that people in Vilnius tend to be overly optimistic and significantly overpay for the real estate they buy.”

Meanwhile an economist of Lithuania's central bank says that is not the case and that people's incomes have been growing significantly faster than home prices.

“Lithuania is one of only eight countries [in the OECD] where, since 2015, salaries outpaced housing prices,” according to Vaidotas Šumskis of the Bank of Lithuania.

He says that real estate is more expensive in Vilnius than elsewhere in Lithuania because developers have to pay more for land and construction workers demand higher wages.

Antanavičius disagrees, however, suggesting that higher salaries in Vilnius allow people to take out bigger loans which, in turn, incentivizes sellers to raise prices.

“There is always a part of players in the market that behave less rationally, they simply buy at the prices that are offered and this way maintain the price level or even elevate it,” Antanavičius says.

Many property buyers in Vilnius buy to let. The Lithuanian Investment Index suggests that, over the last two decades, investment into properties for rent earned the highest rate of return: 8 percent last year and 14 percent over the last 20 years.

There is caveat, however, that the investment is worthwhile only if one can buy real estate with one's own money.

“Using a loan is very risky,” according to Vaidotas Rūkas, investment management department director at INVL Asset Management. “If, for instance, you pay in 15 percent of your own money [and take out a loan for the rest] and housing prices fall as they did during the crisis 20 or 30 percent, it means that your investment is gone and, on top of that, you are indebted to the bank.”

About half of housing purchases in the country are covered without bank loans, according to data by the Bank of Lithuania.

Still, Taurimas Valys, who took out a mortgage in 2007, is optimistic.

“Warren Buffett has said that you only lose if you sell,” he muses. “I am not planning to sell and hope that perhaps in 20 years, the value will be back at what it was.”

Analysts say that a sharp drop in housing prices is unlikely. However, the Bank of Lithuania expects that interest rates on loans will inevitably go up and prospective home buyers must take that into account.

LRT has been certified according to the Journalism Trust Initiative Programme

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