Housing Affordability Analysis: Apartment Accessibility Continues to Improve This Year

Despite households' extremely weak confidence in the future, Tallinn's apartment market picked up noticeably at the end of last year. Activity improved at year-end thanks to falling interest rates and previously postponed purchase decisions. However, the main increase in transaction numbers was in the secondary market apartments, as these have a lower price level compared to new developments.

In the last quarter of last year, the number of transactions in the secondary market exceeded the average level of the past ten years. January was also very active in the secondary market. While there were more reservations in new developments in the last quarter of last year compared to the low point of the previous couple of years, their number was still quite modest. For example, in 2016–2019 an average of 750 reservations were made per quarter, whereas in the fourth quarter of 2024 there were 426 reservations.

The increase in new development reservations was supported by new projects that came on the market. Although apartment affordability is improving due to falling interest rates, the high price of new developments has made them more accessible to households with higher incomes. Therefore, a broader improvement in demand will take longer.

The purchasing power of average wages in the apartment market improved last year

Although wage statistics for the last quarter have not yet been published, according to Swedbank's estimate, the net wage growth of more than 7% last year in Tallinn exceeded apartment price growth in the market. Statistics from the Land Board show that secondary market apartment prices rose 3% last year. According to developer website statistics, the average price of new developments last year was 4.5% higher than a year earlier, but developers likely still offered some discounts or free added benefits.

The price gap between new developments and secondary market apartments has widened in recent years. At year-end, new developments were on average 44% more expensive than secondary market apartments. This can be partly explained by a larger share of more exclusive and higher price class apartments in sales offerings, as high interest rates have made new developments unaffordable for many. On the other hand, tax increases also force new development price levels to remain high, even though demand is modest.

Apartment affordability improved last year

Thanks to falling interest rates and strong wage growth, apartment affordability improved last year. In the final quarter of the year, an average family living in Tallinn could afford* a maximum of a 67-square-meter apartment in the secondary market. Affordability was last better than this in the third quarter of 2022.

Based on the Land Board's transaction statistics, an average family could afford a maximum of a 43-square-meter apartment in a new development in the fourth quarter. Affordability was last better than this in a new development in the first quarter of 2023.

Apartment affordability will continue to improve this year

According to Swedbank's forecast, the European Central Bank will continue to cut interest rates this year, with the deposit facility rate reaching 1.75 percent by September. Along with the central bank's interest rate, the euribor, which forms the basis for loan agreements, is also moving downward.

Economic recovery should bring more positive news this year. The labor market has generally held up well during the years of economic decline. Unemployment has risen, but moderately. The unemployment rate is expected to decline gradually this year and the employment rate will remain high. Although tax changes will reduce the purchasing power of the average wage earner this year, interest rate cuts will have a greater positive impact on apartment affordability. Therefore, we forecast a slight improvement in apartment affordability this year, which should in turn support demand.