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Baltic Housing Affordability Index,

Baltic Housing Affordability Index,

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Published by Swedbank AB (publ)

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Published by: Swedbank AB (publ) on Dec 10, 2012
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Housing Affordability Index for Baltics
 
 Measures how well households can afford their purchases of apartments in the three Baltic capitals
 10 December, 2012
Economic Research Department.Swedbank AB. SE-105 34 Stockholm. Phone +46-8-58591000E-mail: ek.sekr@swedbank.com www.swedbank.comLegally responsible publisher: Cecilia Hermansson, +46-8-58597720
Vaiva Šečkutė +370 2 582156; Lija Strašuna
+371 67 445 875;Kristjan Tamla +372 888 7952
The housing affordability index (HAI) strengthened in Riga andVilnius, but weakened in Tallinn although from a high level
During the third quarter of 2012, housing affordability strengthened the most in Riga: the hous-ing affordability index (HAI) – which is calculated for a family whose income is equal to 1.5 of average net wages with an average-sized apartment of 55 square meters – increased from140.4 in the second quarter this year to 152. Over the same period, the HAI in Vilnius in-creased less - from 109.8 to 113, and in Tallinn it decreased marginally to 163.6. This meansthat in the third quarter household wages in Riga were 52% higher than needed to afford anapartment, in Vilnius by 13%, and in Tallinn by 63.6% — according to our norm of 30% of netwages for mortgage costs.
In Tallinn, the HAI declined marginally because of a 3.6% seasonal quarterly decrease in netwages. A 26-basis-point decrease in interest rates had a significant positive, but smaller, ef-fect on affordability. Slightly lower apartment prices contributed somewhat to higher afforda-bility as well.
In Riga, affordability was boosted mostly by interest rates, which were lower by 47 basispoints than a quarter ago. The decrease in apartment prices (of 1.7%) and slightly higher wages (0.5%) also increased the HAI.
In Vilnius, the affordability increase was fuelled mostly by a decrease in interest rates of 32basis points on a quarterly basis. Higher wages (0.1%) lifted affordability, but to a muchsmaller extent. A larger increase in the HAI was held back by a 1.3% rise in apartment prices.
The time needed to save for a down payment increased by almost two weeks in Vilnius, to36.9 months, and by approximately three-and-a-half weeks in Tallinn, to 25.8 months, but de-creased by two-and-a-half weeks in Riga, to 26.3 months.
The HAI is 100 when households use 30% of their net wages for mortgage costs. When theHAI is at least 100, households can afford their housing, according to the established norm.The higher the number, the greater the affordability.
Housing affordability index
163.6179.5152.0156.4113.040506070809010011012013014015016017018019020052006200720082009201020112012TallinnRigaVilniusSources: National central banks, ECB, National statistical departments, Lithuanian Centre of Registers, Latvian State Land Service and National Real Estate Cadastre, Estonian Land Board andSwedbank.
TallinnRigaVilnius2005109.366.569.6200676.360.356.5200767.253.451.0200886.677.855.32009161.5140.586.42010160.4137.3103.22011154.2145.1102.82012 Q1155.3139.8104.92012 Q2163.7140.4109.82013 Q3163.6152.0113.0
 
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Housing Affordability Index for Baltics 10 December, 2012
Components of the HAI: apartment prices, interest rates, and wages
Apartment prices
From the second to the third quarter of 2012, the price of apartments in Vilnius grew by 1.3%, and de-creased by 1.7% and 0.3% in Riga and Tallinn, respectively. On an annual basis, the price of an aver-age-sized apartment, of 55 square meters, grew the most in Riga (7.8%), followed by Vilnius (5.1%)and Tallinn (3.1%).In the third quarter of 2012, this standard apartment was the most expensive in Vilnius, where its pricereached EUR 61,871. This same apartment cost EUR 60,545 in Tallinn and EUR43,682 in Riga.In the third quarter, apartment prices in Riga were 48.5% lower than those seen during the peak.Prices in Vilnius and Tallinn were, respectively, 32.7% and 33.6% lower than their peak; the price cor-rection was the smallest in Vilnius, and the prices in Tallinn recovered the fastest from their troughcompared with the other Baltic capitals.In Riga, where apartment prices are still at the lowest level compared with their peak, annual pricegrowth remained the fastest among Baltic capitals; however,this slowed from 11% growth in the sec-ond quarter to 7.8% in the thirdas prices contracted in a quarter. This growth is still mostly driven byprice increases for apartments in the centre of Riga and, to a lesser extent, in newly built houses in thesuburbs. The number of such deals remains low, though, and thus price volatility is high. Meanwhile,prices of Soviet-era blockhouse apartments are not yet rising. Annual apartment price growth in Tallinn decreased from 6.9% to 3.1%. Nevertheless, there are in-creasing signs that the residential real estate market is gradually gaining speed. Over the third quarter,banks issued the highest amount of new mortgages since the end of the boom in 2008. Comparedwith the market trough in 2009, mortgage turnover has increased by over 50%. Annual price growth in Vilnius accelerated from 3.5% to 5.1%. The growth in the number of deals hasgained pace as well. In the third quarter, annual growth increased to 12.1% from 2.7% in the secondquarter. However, this growth was still the lowest in the Baltic capitals as the number of deals in Tal-linn increased by 27.8%, and in Riga by 12.8%. The higher activity might be related to increased sup-ply as the number of completed apartments in Vilnius County rose by 3.5 times to 667 in the first threequarters of 2012, compared with the same period a year ago. Interest rates, which havebeen falling tohistorical lows for a few quarters now, did not encourage household borrowing this year. However, it islikely that low interest rates will have a stronger positive impact on activity in the real estate marketnext year as economic sentiment recovers and real wages start increasing.
Apartment prices, EUR/m2
1,101 EUR1,657 EUR794 EUR1,541 EUR1,125 EUR1,671 EUR6007008009001,0001,1001,2001,3001,4001,5001,6001,7001,80020052006200720082009201020112012TallinnRigaVilniusSources: Lithuanian Centre of Registers, Latvian State Land Service and National Real EstateCadastre, Estonian Land Board and Swedbank.
Interest rates on mortgages
During the third quarter, interest rates decreased on a quarterlybasis in all three countries. In Estonia,they declined by 26 basis points to 2.94%; in Lithuania, by 32 basis points to 3.03%; and in Latvia, by47 basis points to 3.36%. Mortgage interest rates have been declining, mostly due to the falling euro
 
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Housing Affordability Index for Baltics 10 December, 2012
interbank offered rate (EURIBOR). The three-month EURIBOR fell from 0.69% in the second quarter to 0.36% in the third quarter this year.Interest rate differentials in the third quarter of this year again became the main reason why apart-ments were more affordable in Tallinn than in Riga.
Annual percentage rate of charge for new mortgages to households
2.94%6.5%3.36%7.8%3.03%6.4%2.5%3.0%3.5%4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%20052006200720082009201020112012EstoniaLatviaLithuaniaSources: National central banks and ECB.
Average net wages
From the second quarter to the third quarter of this year, the average net wages of households in-creased by 0.5% in Riga and 0.1% in Vilnius, but decreased by 3.6% in Tallinn. In an annual compari-son, wages rose the most in Tallinn, where, growth reached 5.5% and the net wages earned by anaverage household was EUR1,175 in the third quarter. Over the same period, net wages in Riga in-creased by 2.9% to EUR 830, and, in Vilnius, by 2.7% to EUR 839.The difference in affordability between Tallinn and Vilnius is mostly dependent on wage differences. InTallinn, households earned 40% more than in Vilnius, while apartment prices in the Estonian capitalwere 2.1% lower in the third quarter of this year. Housing in Riga is also considerably more affordablethan in Vilnius: Vilnius households earn only 1% more than their counterparts in Riga but pay 41.6%more in apartment prices.The ratio of wages to apartment prices improved in Riga but worsened in Tallinn from the second tothe third quarter. In Vilnius, the ratio deterioratedonly marginally; this increased saving time a bit, butwas not enough to prevent the increase in affordability.
Average net wage, EUR
783.0553.5559.225030035040045050055060065070075080085020052006200720082009201020112012TallinnRigaVilniusSources: National statistical departments.
The HAI value of 163.6 in Tallinn means that household net wages in this city are 63.6% higher thanrequired to afford an apartment, according to our norm (mortgage costs account for 30% of net wagesof a household that earns 1.5 of the average net wage). In Latvia, meanwhile, household net wages

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