Construction Sector Sets Course for Growth

The Estonian economy is gradually recovering, and with it, the construction sector's outlook is improving. Next year, the government's infrastructure investments will support the sector, and the abolition of the tax wedge will increase demand for residential real estate.

In the third quarter, the volume of construction work performed in Estonia increased by 0.4% compared to the same period last year. Growth was driven by an increase in building construction volume, but was slowed by infrastructure construction.

Building construction volume on the local market increased by 2% in the third quarter. Buildings account for just over 60% of all construction, and the impact of this growth is therefore significant. The volume of building construction in Estonia had been declining until the last quarter of 2024, ending a decline in building construction that had lasted more than two years.

Infrastructure was built on the local market 2% less in the third quarter compared to a year ago. Infrastructure construction volume turned negative in the third quarter of 2024, and the decline has now lasted five quarters. Against the backdrop of the prolonged decline in building construction, infrastructure construction had previously supported overall construction to a greater extent. Infrastructure construction is largely supported by government infrastructure projects.

The construction sector's outlook is optimistic

Construction companies' confidence has improved significantly since January's low through the beginning of the fourth quarter and is already approaching the long-term average. The assessment of the construction order portfolio has also improved since the beginning of the year. 

The decline in interest rates has significantly increased household demand for housing. Apartment affordability has also been supported by a gradual improvement in the ratio of apartment prices to wages. It is true that demand for new development apartments has increased at a significantly slower pace compared to the secondary market, mainly due to the higher price level.

Nevertheless, real estate developers have reason to look more optimistically toward the future. The government's planned increase in the tax-free income threshold and the abolition of the tax wedge will significantly accelerate average net wage growth next year. Since the abolition of the tax wedge means faster net income growth for people earning above the median wage, this in turn supports housing market demand. In anticipation of these positive changes, household confidence also improved noticeably in September and October.

Developers' improving confidence is reflected in a higher number of building permits. The number of building permits issued for residential spaces, which declined over the previous four years, increased by 38% in the first nine months of this year compared to the same period last year. 5% more residential spaces have been completed in the first nine months of this year compared to a year ago.

In terms of volume, 27% more non-residential buildings were completed in the first nine months of this year compared to the same period last year. The number of building permits issued for non-residential buildings has been on an upward trend over the previous two years. In terms of volume, the number of building permits issued in the first nine months falls short of last year. However, 13% more building permits have been issued in terms of area in the first nine months, and as much as 60% more in the third quarter compared to last year. The decline in interest rates has also increased corporate loan growth. An improving business environment should give companies more confidence to make investments, including in buildings and infrastructure.