The Bank of Lithuania is recording a rapid acceleration in house price growth, which has doubled since the start of the year. Economists are divided – some warn that a property bubble is forming, while others say the rise in prices is, for now, justified.
SEB Bank economist Tadas Povilauskas says signs typical of a bubble are emerging in the property market. He argues that this is being driven not only by price dynamics but also by household expectations.
“Our survey shows that almost 70% of residents expect house prices to rise over the next 12 months. Over the 14 years of observation, this is the second-highest figure,” the economist says.
According to him, higher expectations were recorded only at the start of 2022, before a period when prices rose by more than 20% over several years.
Povilauskas points out that this year, house prices have grown faster than wages, meaning affordability is deteriorating.
However, Swedbank economist Greta Ilekytė believes it is still too early to talk about a bubble.
“A bubble forms when prices grow at a double-digit pace for a long period, and the market becomes unsustainable. At the moment, we do not see such indications,” she says.
According to Ilekytė, one of the strongest arguments against the existence of a bubble is the level of supply.
“In the primary market, we currently have more than 5,000 unsold homes – a historic high. In 2021–2022, supply was significantly lower,” the economist stresses.
She also notes that some buyers have entered the market now because they were waiting for interest rates to fall, and previously simply could not afford to buy a home.
Bank of Lithuania economist Daumantas Skinkys calculates that the pace of house price growth has clearly accelerated this year.
“Over the year, house prices in Lithuania have risen by around 10–12%, depending on the indicator. That is twice as fast as at the start of the year, when annual growth was about 5%,” he says.
Artea Bank economist Indrė Genytė-Pikčienė also sees an increased risk of a bubble forming.
According to her, falling mortgage interest rates are encouraging more active borrowing.
“Annual growth rates in the mortgage loan portfolio granted to households are in double digits. Demand remains very strong, which means that future price developments will largely depend on supply – whether developers can keep up with this demand,” the economist explains.
Meanwhile, Mindaugas Statulevičius, president of the Lithuanian Real Estate Development Association, says the market is experiencing an upswing, but he does not yet see signs of a bubble.
“Major cities – Vilnius, Kaunas, and Klaipėda – are growing, and demographic indicators are favourable. What is built is being sold. There is no construction ‘for storage’, no unsustainable development process,” he says.
According to Statulevičius, it is still too early to talk about serious tensions in the market.
Skinkys of the Bank of Lithuania emphasises that the stability of price growth will depend heavily on whether supply can keep pace with demand.
“If housing supply is sufficient, a sharp surge in prices can be avoided,” he says.
According to the economist, demand could also be further affected in the future by a lower minimum deposit requirement for first-time buyers. From this summer, the mandatory deposit will be reduced from 15% to 10%.
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