Apartment Affordability Improved Significantly in the First Quarter

Rapid growth in household incomes improved apartment affordability at the beginning of the year and supported demand. Greater market activity contributed to accelerating price growth on the secondary market. The number of bookings in new developments in the first quarter was significantly higher than a year ago, but still remains below the long-term average. Higher euribor may worsen apartment affordability compared to the first quarter, but by the end of 2026, apartments should be more affordable than a year ago.

Rapid income growth supports housing market activity

Tallinn's apartment market was active at the beginning of the year. According to Land and Cadastre Board data, there were more secondary market transactions in the first quarter than a year ago. Although activity remains concentrated on the secondary market, the number of bookings in Tallinn's new developments increased significantly, according to Swedbank data, as net wages, which have grown significantly this year, enable households to take larger housing loans than before.

Apartment price growth on the secondary market accelerated as expected

Secondary market apartment price growth in the first quarter accelerated as expected – supported by higher market activity, it grew 6.5% in annual comparison. According to developers' websites, price growth for new developments was slower and reached an average of 3.7%. Meanwhile, the number of new development apartments for sale in Tallinn reached an all-time high in the first quarter. This creates conditions for the price gap between the two market segments to gradually narrow, as the supply in the new developments market is sufficient given current purchase activity.

Net wage purchasing power in the housing market continues to improve from the 2022 low. At the beginning of the year, the improvement was significant thanks to strong net wage growth, which was supported by the tax reform – abolishing the "tax bracket" while introducing higher tax-free income. By now, net wage purchasing power on the secondary market has recovered to near 2019 levels, when the ratio of apartment prices to wages was among the most favorable in the last decade. On the new developments market, however, it is still weaker, and the number of square meters available for one wage remains significantly below 2019 levels.

War in the Middle East brings interest rates back to the forefront

According to Swedbank's assessment, a household in Tallinn earning 1.5 times the average net wage* could afford an apartment of up to 77 square meters on the secondary market in the first quarter. A year ago at the same time, the corresponding figure was nearly 70 square meters. Based on developers' offering prices, in the first quarter it was possible to buy an approximately 44 square meter apartment in a new development, while a year ago it was possible to buy up to a 39 square meter apartment.

The war in the Middle East accelerates inflation compared to earlier forecasts and brings the topic of interest rates back to the forefront. According to our forecast, the European Central Bank will raise interest rates twice this year – in June and September – totaling 0.5 percentage points.

Euribor has risen since March, and the current level fully reflects our assessment of expected interest rate increases. Compared to first quarter levels, apartment affordability may decrease. However, despite higher euribor, apartments should be overall more affordable in 2026 than in the previous year, as net wage growth remains rapid this year.

In Baltic capitals, price growth was fastest in Vilnius

Strong demand boosted apartment price growth in Vilnius, which exceeded 13% in annual comparison in the first quarter. Wage growth lagged behind apartment price growth, so apartment affordability in Vilnius deteriorated compared to both the previous quarter and a year ago. The withdrawal of second pillar pension savings is likely keeping both activity and price growth high in Vilnius this year.

Riga generally has better apartment affordability compared to Tallinn and Vilnius, as the Riga apartment market is dominated by transactions in Soviet-era apartment buildings. In the first quarter, wage growth in Riga was faster than apartment price growth and interest rates were lower than a year ago. This in turn improved apartment affordability. However, apartment affordability in Riga peaked at the end of last year, when the ratio of apartment prices to net wages was most favorable.

According to Swedbank's calculations, a household in Riga could afford an average of a 63 square meter apartment in a new development in the fourth quarter. In Vilnius, an affordable apartment in a new development was 57 square meters. In Tallinn, the corresponding figure based on Land and Cadastre Board transaction statistics was 49 square meters. Since these are previously concluded agreements that are reflected in statistics with a time lag, the actual affordability of new development apartments available for purchase is lower.

On the secondary market, a household in Vilnius could afford an average of a 64 square meter apartment in the third quarter. Although comparable data is lacking in Riga, the situation there regarding secondary market apartment affordability overall is better than in Tallinn and Vilnius.