Tallinn University of Technology
Estonian housing market -
before euro adoption
Angelika Kallakmaa
Ene Kolbre
Tallinn University of Technology
Tallinn University of Technology
Estonia 2010
In the same time, when other EU countries deal with government debt and public deficit problems, Estonia fills Maastricht criteria
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Maastricht criteria
Maastricht criteria Reference value Estonia
Inflation rate 1,0% -0,7 %
Participation in the currency exchange rate mechanism ERM II
2 years The Estonian kroon has been participating in ERM II since 2004
The general government deficit
Must be lower than 3% of GDP
1.7% of GDP
Government debt Must be less than 60% of GDP
7.2% of GDP
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Economic situation
During 2000 - 2007 Estonia’s output growth was faster than in most emerging market economies
Since 2008, the economy has been experiencing a hard landing period
Restored growth in Estonian exports will be balanced economic situation in Estonia in the second half of 2010
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Economic background and forecast
2006 2007 2008 2009 2010* 2011* 2012*
GDP (%) 10,0 7,2 -3,6 -14,1 1,0 4,0 3,3
Private consumption expenditure (%)
13,0 9,1 -4,8 -18,9 -5,6 1,6 3,8
Unemployment rate (ILO) (%)
5,9 4,7 5,5 13,8 16,0 14,5 13,2
Real wage growth (%)
10,4 12,0 4,3 -3,8 -4,2 0,1 1,9
Average gross wage growth (%)
16,2 20,4 13,8 -4,6 -3,8 1,2 3,2
Nominal credit growth (%)
51,6 30,2 7,3 -6,4 -2,4 2,3 3,8
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Employment
Housing boom increased employment in the real estate and related sectors
At the end of the growth period, the economy reached the stage of full employment
After real the estate boom the unemployment rate skyrocketed
The unemployment level will probably remain high over the next years
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The wages and salaries
The average gross wages and salaries have decreased, but the decrease slowed down in the
1st quarter 2010 The real wages,which took into account the
influence of the change in the consumer price index, decreased 2.6% in the 1st quarter 2010
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Average monthly gross wages and salaries, 1st quarter 2006– 1st quarter 2010 (EUR)
1st quarter 2nd quarter
3rd quarter
4th quarter Year
2006 549 609 580 653 601
2007 660 738 697 784 725
2008 788 850 800 838 825
2009 776 813 752 783
2010 758
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Information asymmetries between borrowers and lenders
When economic conditions are depressed and collateral values are low, information asymmetries can mean that even borrowers with profitable projects find it difficult to obtain funding
When economic conditions improve and collateral values rise, these firms are able to gain access to external finance and this adds to the economic stimulus.
This explanation of economic and financial cycles is often known as the “financial accelerator”
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Procyclicality effect
During an economic boom financial sector inclines to strengthen the impact of a business cycle through intensifying lending activity
and vice versa
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Männasoo 2003
“Since 2001, the growth in loans has accelerated again, reaching markedly high speed in 2002
The share of provisions has decreased and this has supported in keeping capitalisation high
The banking sector’s reaction to the economic upturn indicates some rise of procyclical optimism”
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Loans granted to individuals (stock, Mln EEK)
0
20000
40000
60000
80000
100000
120000
140000
31.12.00 31.12.01 31.12.02 31.12.03 31.12.04 31.12.05 31.12.06 31.12.07 31.12.08 31.12.09
Loans to individuals
housing loans
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Loans granted to individuals during a month 2000-2010
Loans to individuals
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
11/30/00 10/31/01 09/30/02 08/31/03 07/31/04 06/30/05 05/31/06 04/30/07 03/31/08 02/28/09 01/31/10
Loans to individuals
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Campell (2006)
Household’s behaviour is difficult to measure and they are not always fully rational when they making financial decisions
Households make investment mistakes, given the complexity of their financial planning problem and the often confusing financial products that are offered to them
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Questionnaire 2010 April
Purpose:
Evaluate the access to bank loans during the housing boom time
Expectations about real estate market movements
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Questionnaire 2010 April
There were 350 repliers (287 female, 62 male) 57 % are owners of their living space, others live
with parents or rent Persons who don’t own the living space – more
then half of them don’t plan to buy real estate in the next years
(Reason – 34 % real estate prices are still too high, 45 % disposable income is too low to take a loan)
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Credit availability to households housing loans
43% of repliers found that it was too easy to get loan from banks
19 % bank condition was that loan must be taken jointly with another person
Only 1% answered that bank asked too high self financing amount
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Influence for consumption
45 % housing loan repayment amount is 30 % of disposable income
30% of repliers found that increase in interest rates will make their loan payments difficult (part of repliers did not answer at all)
6% said they have difficulties in everyday life Only 2% of repliers are ready to sell their property
when they have difficulties with loan payments
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Conclusions
It is common to own your living space, not to rent it Access to bank credit was too easy during the real estate
boom Clients with problems don’t want to renounce their
property, only 2 % admit to the possibility of selling their flat or house
Not owners are not planning to buy, they preferred to live with parents or rent the living space
Housing loans have an important influence to the consuming activity
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There was the procyclical effect in lending activity Credit risk was underestimated in the boom time It seems to be that the overheating was stronger
than the downturn
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According to the Estonian institute of economic research:
In 2009 was the consumer confidence lowest of all the survey period (since 1992)
48 % of consumers assesses that the economic situation of their household was worse then a year ago
Only 4% had a better situation
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Individuals loans and deposits
0
20000
40000
60000
80000
100000
120000
140000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Deposits of individuals (stock)
Loans to individuals
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Overdue loans and overdue housing loans (1997-2009 annual basis, 2010 monthly basis)
0
2000
4000
6000
8000
10000
12000
mln
EE
K
Overdue amount of loans Overdue amount of housing loans
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Overdue loans
The stock of overdue loans did not change much in 2010
The share of housing loans overdue by more than 60 days increased, reaching 4.6%
Improvement in the quality of the loan portfolio is a time-consuming process, which will take years even if economic activity picks up
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Housing finance market activity remained sluggish
demand for housing loans is low
( irrespective of the relatively low price level of real estate)
The stock of new housing loans issued within the April 2010 was 13% smaller than the average level of 2009
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Housing market
Prices of apartments started to rise rapidly in 2005 when the annual price rise was over 50%
The growth rate of transactions started to slow down in the middle of 2006
The price rise turned to decline in 2007 when the housing prices reached the maximum
Average price fall since spring 2007 has been 40-45%
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Real estate purchase and sales transactions 2000-2010
0
10000
20000
30000
40000
50000
60000
70000
80000
Number of contracts
Value of contracts (mln EEK)
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Housing demand
Total volume of housing loans has increased as a result of low interest rate and tight competition in the banking sector
The rise in housing market was mostly driven by consumers expectations (stories of unprecedented
price increases etc) easy access to credit (housing loan standards )
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Average gross monthly wages and average price for a square metre of a two-room apartment in Tallinn (EEK)
Average gross monthly wages and average price for a square meter of a two-room apartement in Tallinn (EEK)
0
5000
10000
15000
20000
25000
30000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EE
K
Gross Wages and Salaries Price per 1m2
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Number of square meters of a two-room apartment in Tallinn obtainable for average gross monthly wages
Number of square meters of two-room apartment in Tallinn obtainable for average gross monthly wages
0,00
0,20
0,40
0,60
0,80
1,00
1,20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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Housing supply
In 2004−2006 demand for housing was greater than supply
Since the beginning of 2007 supply started to grow rapidly
Since 2008 supply has been greater than demand
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Granted building permits and completed dwellings (new construction)
0
2000
4000
6000
8000
10000
12000
14000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
granted building permits
completed dwellings
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Dwelling completions by type of owner (new construction)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Local governement
private person
other owner
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Conclusions (1)
Real estate prices are very cycle-sensitive It is difficult for banks to follow more prudent
policies during an economic upturn, especially in a highly competitive environment
The supervisory pressure on banks seems also to be procyclical (if real estate prices are rising, loan portfolio is rising, banks declare good earnings - it is very difficult to explain concerns with such situations)
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Conclusions (2)
Households budgets are tighten Borrowers have postponed their investment and
consumption decisions despite of low interest rateIf demand improves, credit growth can be expected
to pick up no sooner than in the second half of the year 2010
Loan losses have increased less than anticipated in last year forecasts
Improvement in the credit portfolio quality of banks will take time
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Conclusions (3)
Adoption of euro - the signals are contradictory
demand is low, but experts speak about the first signs of recovery on the real estate market (Eurozone membership will give easier access to European capital markets)
Some euro-area countries are experiencing a government debt crisis, uncertainties have arisen in the external environment
The bottom of the Estonian real estate market is approaching, although the shape of this bottom is expected to be flat, which means a long vegetating in all economy
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Authors
Angelika Kallakmaa School of Economics and Business
Administration, Tallinn University of Technology e-mail: [email protected] Ene Kolbre School of Economics and Business
Administration, Tallinn University of Technology e-mail: [email protected]
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