Real estate in Lithuania is overvalued by a tenth, while people may find it harder to repay their loans due to rising inflation, according to the Bank of Lithuania.
Lithuanian financial system is currently exposed to three major risks – the aftermath of Russia’s war against Ukraine, the overheating of the housing market, and the persistence of inflation and a possible increase in interest rates – Gediminas Šimkus, head of Lithuania’s central bank, said on Monday.
“Russia’s war against Ukraine [...] has created additional new risks for the Lithuanian financial system, as well as for the financial system of Europe and the world,” Šimkus told a press conference, presenting the country’s Financial Stability Review.
“At the end of last year, exports to Russia accounted for about a tenth of Lithuania’s total exports, while exports to Ukraine and Belarus together accounted for another 7 percent. With the outbreak of this war, due to sanctions and other things, the export volumes have been significantly adjusted,” he added.
According to Šimkus, imports from these countries were also disrupted, which led to higher prices of food, energy, and raw materials.
He stressed that the overheating of the housing market has also become a reality.
“Housing prices continue to rise rapidly and have reached their highest rate since 2007. [...] Housing prices are exceeding economically justified values by a tenth. There is an overvaluation,” Šimkus said.
Before the 2008 economic crisis, housing was overvalued by 50 percent, so the current situation is still quite rational, the head of the Bank of Lithuania added.
“This increase in housing prices is due to a growing imbalance between the demand for and supply of housing,” Šimkus said.
Regarding the third risk – prolonged inflation and a possible increase in interest rates – Šimkus noted that it could have a negative impact on the consumer, which would eventually affect their ability to repay debts or borrow.
However, the financial situation of the Lithuanian population has been improving for years, which helps to withstand rising inflation, he added.
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