Bonava Estonia CEO Taavi Soorm: three reasons why new property prices won't fall in the near term

The number of real estate transactions has turned to slow growth compared to the beginning of the year, and there is increasing speculation about whether the decline in real estate prices has reached its bottom in the near term. It is expected that with the spring thaw, apartment sale prices will also decline. For older real estate, this expectation may be justified, but Bonava Estonia CEO Taavi Soorm certainly does not see a significant price drop for new real estate in the near term. He points out three reasons why he thinks so.

1. New real estate supply will decrease on the market

Increasingly, we are seeing developers postponing projects and waiting to build new houses. The reason is both significantly reduced sales numbers and high construction costs. Material as well as labor costs have grown exponentially in recent years. It is true that there are signs of stabilization, but it must be understood that developers cannot sell cheaper than the construction cost has been. A decrease in construction cost or overproduction could contribute to lower new residential real estate prices, but I definitely do not see the latter happening in the near term.

Quite the opposite. Starting new developments in today's economic situation is rather an exception. The supply of new developments may appear greater than demand on the surface, but it is important to consider what kind of home to buy. Tõnu Toompark has analyzed that there are currently about 2,000 new apartments on the Tallinn market. This may seem like a large number compared to previous years with reduced sales volumes, but in reality it is not. When buying an apartment in a new development, you can choose how many rooms the apartment has, how the spaces are arranged, or which floor the home is on, and attractive apartments are sold off much faster. Those with a larger selection of new apartments who buy earlier can find a suitable home – there will simply be fewer of them coming to the market in the coming years than before.

2. Prices have actually already fallen

Although developers cannot sell cheaper than they build and there is no strong financial price drop visible, virtually all developers on the market are making discount offers today. A free parking space and kitchen, perhaps some additional benefits, such as covering utilities – all these are additional benefits that are given free to buyers today. Some even offer a real financial discount. Regardless of the discount solution, the price advantage remains with the client on average 5-10 percent of the transaction.

I see that crises have taught people about investing as well, and instead of short-term consumption, there is an increasing preference to accumulate funds through long-term investments. For example, by buying real estate and thus avoiding a situation where inflation "eats away" the value of money. Therefore, the demand for new living spaces still exists.

3. Loans won't get cheaper

In order to acquire a home of our own, most of us need to take out a home loan. The balance between supply and demand on the secondary market also affects new residential real estate sales. As our observations show, when given the choice, consumers opt for a new project, because with a home loan for a new apartment, a more favorable interest rate and a longer repayment period come into play. Banks also ask for smaller equity financing for new real estate, typically 15-20%. For older real estate, the share of equity financing is often 30% or more. More and more people are returning to the idea of buying a new home, as they understand that a price drop in new real estate should not be expected in the near term. If there is a housing need, you should not postpone it for years.

Could a new home become more affordable if inflation stabilizes? Unlikely. As inflation decreases and residents' purchasing power improves, further growth in demand for new living spaces is to be expected, and then a shortage will likely occur instead, since supply will fall far behind. It must also be taken into account that under higher base rate conditions, the bank's own rates are currently lower, but as the Euribor falls and the economy picks up, these will also start to rise again. Therefore, postponing home purchase may not change the actual total interest rate at all.