2024 HOUSING MARKET FORECAST: Market recovery begins in Tallinn's residential suburbs

Kinnisvara24 CEO Urmas Uibomäe and Arco Vara analyst Mihkel Eliste explain how the oversupply of new developments and the expected one percent decline in euribor will affect the residential real estate market in the coming year.

"Due to negative developments in the economy, I do not rule out a moderate price decline of up to 5 percent in the real estate market in the first quarter of this year," predicted Eliste. According to him, the recovery of the market depends on the speed and extent of cheaper loan money becoming available.

"Banks are forecasting that euribor will start declining towards 3 percent from April onwards. Thus, for an average residential loan of 100,000 euros, the monthly loan payment will decrease by approximately 55-60 euros. This will bring some relief to existing loan holders and will hopefully gradually increase the activity of new transactions," noted Uibomäe.

Taking into account the overall macroeconomic environment and related forecasts, positive developments should gradually reach the residential property market from the second half of the year according to Eliste, but initially this will not bring about significant changes. "The secondary market for apartment buildings in residential areas will recover first, as it has been hit the hardest since the year before last and these prices have also experienced the largest decline," predicted Eliste.

According to experts, the new developments market will not normalize this year. Last year, bookings for new apartments in Tallinn decreased by nearly 75 percent compared to the peak three years ago, and currently approximately one-third of the living spaces in new apartment buildings remain unsold. According to Eliste, he also does not see factors that would force developers to lower the prices of new apartments more than before at the current level of demand, as the supply volume of new residential space has not actually increased in a year.

The increase in the number of building permit applications and issuances does point to active planning activity, but on the other hand, the financing of new developments by banks has decreased and the start of construction on new projects is increasingly being postponed. Since there are fewer buyers for new apartments, according to Eliste, it is not expedient to develop them on the previous scale.

"In some Estonian small towns, developers have already begun to experience liquidity problems and in developments related to undeveloped land, the number of bankruptcy and enforcement proceedings in Harjumaa has also begun to increase as expected," he highlighted the problem areas related to the market downturn. At the end of last year, several developers began renting out vacant apartments on a large scale to reduce losses.

Since there is currently an oversupply in the rental market, we cannot hope that rental prices will begin to rise before autumn. In the second half of summer, students in Tallinn and Tartu will again start looking for new living space, and this will push prices up slightly.

"In a very long-term perspective, however, the growth in rental prices will continue, as owners will try to eventually pass on the increased loan costs from the rise in euribor to tenants, and the overall inflationary environment will also have an impact on rental costs," said Eliste.