Eamets: Housing Price Index Made Sharp Rise, But Interest Rate Increase May Start Cooling Market

The housing price index published by Statistics Estonia today showed that the recovery that began at the end of last year gained good momentum in the first quarter. The housing index grew 12% compared to the same quarter of the previous year. While last year the market was enlivened primarily by increased sales of older apartments, now new development prices have also begun to rise.  

Two important reasons for the rise in the housing price index are the growth of people's incomes, which is driven by wage increases and the elimination of the tax wedge, and on the other hand the interest rate decline that occurred last year. Since the beginning of the year, before the Iran conflict, there was a general understanding that interest rates would remain stably low also at least during this year, which gave potential buyers confidence to proceed with transactions.  

By now the geopolitical situation has changed and the European Central Bank has also begun raising interest rates, to which Euribor has responded, and currently Euribor is already around 2.6%, which means that markets expect at least one more interest rate increase from Frankfurt. Two interest rate increases are also not ruled out if inflation expectations remain high. 

Apartment prices grew by as much as 15%, which is a very rapid increase. From Statistics Estonia's press release, it can be seen that the growth came primarily from the price increases of apartments sold outside Tallinn. The rise in the housing price index demonstrates well that this is an asset whose value grows over time along with general price increases. Compared to three years ago (Q1 2023), apartment prices have grown 31%, house prices 16.5%. 

Looking to the future, two developments are possible. The rise in interest rates will begin to cool the housing market, as borrowing becomes more expensive. Second, rapid inflation encourages borrowing, as the future value of loan payments decreases and, in addition, real estate prices grow faster than consumer price increases. For those who think ahead about their future longer term, purchasing real estate is certainly a wise decision.  

I looked out of curiosity how much the housing index has grown over 10 years.  If we compare the first quarter of 2016 with the first quarter of 2026, real estate prices have grown 141%. In numbers, this means that an apartment that cost 100,000 euros 10 years ago costs 241,000 euros today.