Housing Affordability Index for Baltics

Measures how well households can afford their purchases of apartments in the three Baltic capitals

14 March, 2013

The housing affordability index (HAI) increased to 127.8 in Vilnius, 156.7 in Riga, and 171.8 in Tallinn
During the fourth quarter of 2012, housing affordability strengthened the most in Vilnius: the housing 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 (sq. m.) increased from 113.1 in the third quarter of that year to 127.8 in the fourth. Over the same period, the HAI in Tallinn increased from 163.2 to 171.8 and in Riga from 151.7 to 156.7. This means that in the fourth quarter household wages in Vilnius were higher than needed to afford an apartment by 27.8%, and in Tallinn by 71.8% and in Riga by 56.7% according to our norm of 30% of net wages for mortgage costs. In Tallinn, the HAI increased mainly due to a 5.9% increase in wages. A 13-basis-point decrease in interest rates was more than outweighed by the negative effect of a 2.4% rise in apartment prices. In Riga, affordability was lifted by a 2.3% increase in wages and a 1% fall in apartment prices. Interest rates stayed unchanged at 3.4%. In Vilnius, affordability was boosted mostly by a 4.9% decrease in apartment prices and a 32basis-point decrease in interest rates. A 3% rise in wages also had a positive, albeit, smaller effect on affordability. The time needed to save for a down payment decreased by almost two months and three weeks in Vilnius, to 34 months, and by almost a month in both Tallinn and Riga, to 25 and 25.5 months, respectively. The HAI is 100 when households use 30% of their net wages for mortgage costs. When the HAI 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
190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 40 179.5 171.8 156.4 156.7

Tallinn 2005 109.3 76.3 67.2 86.6 161.5 160.4 154.2 155.5 163.8 163.2 171.8 2006
Tallinn Riga Vilnius

Riga 66.5 60.3 53.4 77.8 140.5 137.3 145.1 140.8 145.5 151.7 156.7

Vilnius 69.6 56.5 51.0 55.3 86.4 103.2 102.8 104.9 109.8 113.1 127.8

127.8

2007 2008 2009 2010 2011 2012 Q1 2012 Q2 2012 Q3 2012 Q4

2005 2006 2007 2008 2009 2010 2011 2012 Sources: National central banks, ECB, National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and Swedbank.

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher: Magnus Alvesson, +46-8-5859 3341. Vaiva ekut +370 2 582156; Kristilla Skzkalne +371 67 445 844; Tnu Mertsina +372 888 7589

Components of the HAI: apartment prices, interest rates, and wages

Apartment prices
From the third to the fourth quarter of 2012, the price of apartments in the capital of Estonia,Tallinn, grew by 2.4%, while decreasing by 1% and 4.9%, respectively, in the capitals of Latvia and Lithuania, Riga and Vilnius. On an annual basis, the price of an average-sized, 55 sq. m. apartment grew the most in Riga (5.7%); the price also rose in Tallinn (5.2%), but decreased by 4.7% in Vilnius. In the fourth quarter of 2012, this standard apartment was the most expensive in Tallinn, where its price reached EUR 61,975. This same apartment cost EUR 58,802 in Vilnius and EUR 43,233 in Riga. In the fourth quarter, apartment prices in Riga were 49% lower than those seen during the peak. Prices in Vilnius and Tallinn were, respectively, 36% and 32% lower than their peaks; the price correction was the smallest in Vilnius, and the prices in Tallinn recovered faster from their trough than in the other Baltic capitals. In Riga, where apartment prices are still lower compared with their peak, annual price growth remained the fastest among Baltic capitals; however, it slowed from 7.7% growth in the third quarter to 5.7% in the fourth as prices slightly contracted. This decline was mostly driven by price decreases for newly built houses in the suburbs; meanwhile, prices of Soviet-era blockhouse apartments are largely flat. However, the number of deals is still low, hence, price volatility is high. Overall, the number of new loans issued for households remains generally low, and an immediate improvement is not on the horizon. Annual apartment price growth in Tallinn increased from 3.1% to 5.2%. Although the number of deals is still growing in annual comparison, the growth rate in the fourth quarter decelerated to 8% from 28% in the third quarter. Compared with the previous quarter, the number of deals fell by 2.4% together with the decrease in supply. Nevertheless, the real estate market, as well as the issuance of housing loans, should continue to grow in 2013 at a moderate pace. In the last quarter, apartment prices in Vilnius contracted on an annual basis for the first time in two years and were 4.7% lower than a year ago. The number of deals continued its double-digit growth, as in a year it increased by 11.5%--the fastest growth amongst the Baltic capitals. The higher activity might be related to the increased supply. High supply compared with still moderate demand probably caused the decrease in prices as well. The number of completed apartments in Vilnius city in 2012 reached 1,905 - the highest number since 2010 and 2.2 times higher than in 2011. Household borrowing continued to fall throughout 2012. However, we think that borrowing should increase this year as economic sentiment recovers and real wages start increasing; this should allow prices to stay stable.
Apartment prices, EUR/m2
1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 2005 2006 2007 2008 2009 2010 2011 2012 Sources: Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and Swedbank. 786 EUR 1,127 EUR 1,069 EUR 1,657 EUR 1,671 EUR 1,541 EUR Tallinn Riga Vilnius

Interest rates on mortgages

Interest rates decreased on a quarterly basis in all three countries except Latvia, where they remained unchanged at 3.4%. In Estonia, they declined by 13 basis points to 2.8%, and in Lithuania by 32 basis points to 2.7%. Mortgage interest rates in Estonia decreased by a similar amount as the euro inter-

Housing Affordability Index for Baltics 14 March, 2013

bank offered rate (EURIBOR). The three-month EURIBOR fell from 0.4 in the third quarter to 0.2% in the fourth quarter in 2012. In Lithuania, interest rates decreased more than interbank interest rates, meaning that high liquidity in the market probably led to lower margins. Interest rate differentials in the fourth quarter were the main reason why apartments were more affordable in Tallinn than in Riga. This is because the ratio of wages to apartment prices is similar in both cities. Wages in Vilnius were the lowest in relation to apartment prices in the Baltic countries, although during the fourth quarter the ratio also improved the most.
Annual percentage rate of charge for new mortgages to households
8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2005 2006 2007 2008 Sources: National central banks and ECB. 2009 2010 2011 2012 3.36% 2.81% 2.71% 6.5% 7.8%

6.4%

Estonia Latv ia Lithuania

Average net wages

From the third to the last quarter of 2012, average net wages of households increased by 5.9% in Tallinn, 3% in Vilnius, and 2.3% in Riga. In an annual comparison, wages rose the most in Tallinn, where growth reached 4.8% and net wages earned by an average household were EUR 1,241 in the fourth quarter. In Riga, net wages increased by 3.4% to EUR 847, and, in Vilnius, by 2.8% to EUR 864. The difference in affordability between Tallinn and Vilnius is mostly dependent on wage differences. In Tallinn, households earned 44% more than in Vilnius, while apartment prices in the Estonian capital were only 5% higher in the fourth quarter of last year. Housing in Riga is also considerably more affordable than in Vilnius, as Vilnius households earn only 2% more than their counterparts in Riga but pay 36% more in apartment prices.
Average net wage, EUR
850 800 750 700 650 600 550 500 450 400 350 300 250 2005 2006 2007 2008 2009 2010 2011 2012 Sources: National statistical departments. Tallinn Riga Vilnius 576 565 827

The HAI value of 171.8 in Tallinn means that household net wages in this city are 71.8% higher than required to afford an apartment, according to our norm (mortgage costs account for 30% of net wages of a household that earns 1.5 of the average net wage). In Riga, meanwhile, household net wages are 56.7% higher, and in Vilnius 27.8% higher, than required to fulfil this norm. In the fourth quarter, mort-

Housing Affordability Index for Baltics 14 March, 2013

gage costs amounted to 17.5% of households net wages in Tallinn, 19.2% in Riga, and 23.5% in Vilnius. Compared with the previous quarter, these ratios are lower by 0.9, 0.6, and 3.1 percentage points, respectively. Net wages of households in Vilnius need to be at least EUR 677 to meet the norm of affordability (defined above). This requirement for household net wages is higher in TallinnEUR 722because of higher prices and interest rates. Meanwhile, households in Riga, which enjoy the lowest apartment prices, have to earn only EUR 541 to afford an apartment 20-25% less than in the other capitals. Compared with a year ago, the income margin when purchasing an apartment or the HAI value widened by 26 points in Vilnius. Interest rates decreased by 120 basis points and contributed the most to the rise in affordability. The increase of 2.8% in net wages had a positive, but smaller, effect than a 4.7% decrease in apartment prices. Meanwhile, the income margins in Tallinn and Riga widened to a lesser extent - by 17 and 11 points in a year, respectively. Affordability was mostly supported by rising wages in these two cities (4.8% in Tallinn and 3.4% in Riga). Apartment prices were increasing a bit faster in Riga, and interest rates decreased more in Tallinn.

Months to save for a down payment

The number of months needed to save for a down payment, which equals 15% of an apartment price, decreased by approximately two months and three weeks in Vilnius to 34 months and by almost a month in both Tallinn and Riga, to 25 and 25.5 months, respectively, from the third to the fourth quarter of last year. The required saving period declined the fastest in Vilnius due to a significant decrease in apartment prices. It is assumed that a household saves 30% of its net wages every month for a down payment.
Months to save for a down payment
70 60 50 40 34.0 30 20 10 2005 2006 2007 2008 2009 2010 2011 2012 Sources: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and Swedbank. 25.5 25.0 48.2 63.5

60.3

Vilnius Riga Tallinn

Sensitivity analysis
Sensitivity analysis shows that, if apartment prices were to rise by 10%, the affordability margin would decrease by 11.6 points in Vilnius, and by 14.2 points in Riga, and 15.6 points in Tallinn, to 116.1, 142.4, and 156.2, respectively. The margins would disappear in each of the three Baltic capitals if apartment prices were to increase by more than 27.8% in Vilnius, 56.7% in Riga, and 71.8% in Tallinn i.e., by the amount of the current margins. Households would no longer be able to afford apartments if interest rates were to increase by more than 2 percentage points in Vilnius, more than 4 percentage points in Riga, and more than 4.8 percentage points in Tallinn, if other variables remained unchanged.

Housing Affordability Index for Baltics 14 March, 2013

Housing affordability index: method Purpose Norm Definition of housing affordability index Measure changes in household buying power, primarily as this relates to apartment purchases but also an indicator for existing housing. Household mortgage costs, according to our definition, should not exceed 30% of net wages of a household. Actual income in relation to income required to meet the norm, where mortgage costs account for 30% of net wages of a household. If the index = 100, households are using 30% of their net wages. If the index > 100, household buying power exceeds the norm. And if the index < 100, household buying power is below the norm. The index is calculated according to the following formula:

HAI
where

AverageINC *100 NINC PMT . 30%

NINC

HAI housing affordability index AverageINC 1.5 of average monthly net wages NINC net wages that would satisfy the norm PMT monthly mortgage payment Variables Three-month average prices of apartments of average size (55 sq. m.) in capitals. Average net wages of a household, equal to 1.5 of average monthly net wages in capital cities. Three-month average interest rates and other related charges (or annual percentage rate of charge - a rate that comprises an interest component and a component of other charges) for new housing loans to households issued in euros for Latvia and Estonia and weighted against different currencies (the litas and the euro) in Lithuania-- produce the monthly mortgage cost, assuming a 15% down payment and 30-year term. Limits The housing affordability index includes mortgage costs but excludes taxes and subsidies, including property tax and interest deductions. The index provides an indication of the situation for households composed of one or two working people that, combined, earn one-and-a-half times the average monthly wage; however, it does not reflect conditions for individual households. The index does not provide any direct guidance for business decisions, including lending and interest rate decisions. It reflects household buying power, based on apartment purchases that have been made, but says nothing about opportunities for apartment sales. The housing affordability index is of an informative nature and reflects macroeconomic developments, rather than banks' decisions and lending policies or possible decisions made by individual households. Periodicity Geography Quarterly Vilnius, Riga, Tallinn

Housing Affordability Index for Baltics 14 March, 2013

Appendix 1
Housing affordability index Tallinn 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 High Low 113.7 118.4 105.2 100.1 84.2 81.2 70.4 69.5 65.5 67.4 62.6 73.2 80.5 87.1 83.3 95.4 129.6 160.0 179.5 176.9 160.5 162.9 157.3 160.9 161.3 156.9 144.0 154.5 155.5 163.8 163.2 171.8 179.5 62.6 Riga 64.4 66.7 66.4 68.3 60.0 63.4 57.9 60.0 53.0 52.0 47.5 61.1 70.5 75.4 80.0 85.3 116.8 148.3 140.7 156.4 138.5 137.2 134.8 138.6 143.8 146.6 144.3 145.7 140.8 145.5 151.7 156.7 156.7 47.5 Months to save for the down payment Riga 50.0 53.1 53.5 52.5 57.6 53.5 56.3 52.0 57.4 56.7 60.3 46.0 40.7 36.4 31.9 28.8 25.1 22.0 25.1 22.8 26.3 26.4 27.2 26.7 25.4 25.0 25.1 24.9 26.0 25.9 26.4 25.5 60.3 22.0 Vilnius 46.7 53.1 50.9 58.9 62.8 63.5 58.3 62.1 59.1 59.6 59.1 59.9 55.3 54.4 51.7 48.4 44.1 38.1 36.3 35.6 35.3 35.8 34.9 35.4 36.4 36.1 36.1 36.7 37.0 36.5 36.9 34.0 63.5 34.0

Vilnius Tallinn 72.6 69.8 75.2 60.5 58.6 55.8 58.6 53.1 54.4 51.1 50.0 48.5 54.1 53.5 54.4 59.0 68.8 87.7 93.9 95.5 100.6 102.6 104.9 104.6 102.4 103.8 103.4 101.8 104.9 109.8 113.1 127.8 127.8 48.5 32.7 32.7 37.4 38.6 44.0 44.0 48.2 46.9 47.8 45.3 46.9 39.5 37.3 34.0 33.5 29.8 25.6 22.3 20.6 21.3 23.1 23.1 23.9 23.8 23.7 24.4 26.4 24.9 25.3 24.9 25.8 25.0 48.2 20.6

Average 122.4 103.7 79.8 32.0 37.3 46.5 Sources: National central banks, National statistical departments, Lithuanian Centre of Registers, Latvian State Land Service and National Real Estate Cadastre, Estonian Land Board, Swedbank

Housing Affordability Index for Baltics 14 March, 2013

Economic Research Department

Sweden
Magnus Alvesson Head of Economic Forecasting Jrgen Kennemar Senior Economist Anna Ibegbulem Assistant +46 8 5859 3341 +46 8 5859 7730 +46 8 5859 7740 magnus.alvesson@swedbank.se jorgen.kennemar@swedbank.se anna.ibegbulem@swedbank.se

Estonia
Tnu Mertsina Chief Economist, Estonia Teele Reivik Economist +372 888 7589 +372 888 7925 tonu.mertsina@swedbank.ee teele.reivik@swedbank.ee

Latvia
Mrti Kazks Deputy Group Chief Economist Chief Economist, Latvia Lija Stra una Senior Economist Kristilla Skzkalne Economist +371 67 445 859 martins.kazaks@swedbank.lv

+371 67 445 875 +371 67 445 844

lija.strasuna@swedbank.lv kristilla.skuzkalne@swedbank.lv

Lithuania
Nerijus Maiulis Chief Economist, Lithuania Vaiva ekut Senior Economist Laura Galdikien Economist +370 5 258 2237 +370 5 258 2156 +370 5 258 2275 nerijus.maciulis@swedbank.lt vaiva.seckute@swedbank.lt laura.galdikiene@swedbank.lt

Housing Affordability Index for Baltics 14 March, 2013

Disclaimer
This research report has been prepared by economists of Swedbanks Economic Research Department. The Economic Research Department consists of research units in Estonia, Latvia, Lithuania, and Sweden, is independent of other departments of Swedbank AB (publ) (Swedbank) and responsible for preparing reports on global and home market economic developments. The activities of this research department differ from the activities of other departments of Swedbank, and therefore the opinions expressed in the reports are independent from interests and opinions that might be expressed by other employees of Swedbank. This report is based on information available to the public, which is deemed to be reliable, and reflects the economists personal and professional opinions of such information. It reflects the economists best understanding of the information at the moment the research was prepared and due to change of circumstances such understanding might change accordingly. This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge this report is correct and accurate, however neither Swedbank nor any enterprise belonging to Swedbank or Swedbank directors, officers, or other employees or affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faults within this report. Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financial services (issue loans, among others) to them. Aforementioned circumstances might influence the economic activities of such companies and the prices of securities issued by them. The research presented to you is of an informative nature. This report should in no way be interpreted as a promise or confirmation of Swedbank or any of its directors, officers, or employees that the events described in the report shall take place or that the forecasts turn out to be accurate. This report is not a recommendation to invest into securities or in any other way enter into any financial transactions based on the report. Swedbank and its directors, officers, or employees shall not be liable for any loss that you may suffer as a result of relying on this report. We stress that forecasting the developments of the economic environment is somewhat speculative in nature, and the real situation might turn out different from what this report presumes. IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT SOLELY ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY

Housing Affordability Index for Baltics 14 March, 2013