Mortgage Interest Rates Are on the Rise
In August 2018, new residential loans worth 107.2 million euros were issued in Estonia, which was 0.8 million less than in the same month a year ago, but still 18% more than in August 2016. During the first eight months of the year, approximately 8% more residential loans have been issued than in the same period last year, but the further growth rate has begun to slow down in line with the slowdown in the number of transactions on the real estate market since mid-year. As of the end of August, Estonian households' residential loan debt totaled 7.4 billion euros, which is slightly more than our households' savings balance of 7.2 billion euros. Because of this, one might argue that the capitalization of households is extremely good, but at the same time, it must be taken into account that a large portion of the savings balance is still concentrated in the hands of the wealthier population.
As of the end of August, there were 178,578 residential loans in Estonia, which was 2.2% more than a year ago. Alongside the cooling of the residential real estate market growth, the changes in indicators related to loan volumes and loan agreements have also begun to slow down. Further real estate market growth is also being hindered by a certain increase in interest rates, which has accelerated significantly this year. The average interest rate for residential loans issued in August was 2.60%, and the average interest rate has already set records for the past several months in a row. The last time the average residential loan interest rate was at a similar level was in spring 2014.
Average residential loan interest rate has continued to rise
In absolute terms, interest rates are still rather low, as the Euribor rate has not changed for borrowers, and compared to, for example, spring 2007, the average home loan interest rate is currently half lower. In the coming years, due to certain changes in the European Central Bank's monetary policy measures, we can expect a halt in the growth of bank margins, but interest rates are unlikely to fall for the end consumer. Since February this year, the average residential loan interest rate has increased by approximately 11%. If in the interim period the growth was mainly driven by increased demand and rather low competition in the loan market for individuals, then recently the growth can probably be interpreted as being related to a change in the quality of loan clients.
The profile of real estate buyers has changed slightly
Among the clientele of real estate offices and persons interested in acquiring real estate on the real estate market, there is increasingly noticeable growth in the share of lower-wage individuals. Analyzing, for example, the sales pace of new developments belonging to a significantly higher price category than average, the purchasing interest shown by the population belonging to the wealthier segment and foreigners on the real estate market could be considered somewhat more active in the earlier years, and not as much in the current period. Improved economic conditions and rapidly growing average income have created opportunities for real estate purchases for those who previously were forced to participate only in the rental market or live in residential space that did not actually meet their needs.
Labor shortages in almost all sectors have brought employment-related indicators to record levels in many places in Estonia, and the well-being and sense of security of the working-age population for future periods have remained consistently high. Those who also follow mainstream media could have noticed some time ago that Ida-Virumaa is no longer the region with the lowest unemployment in Estonia. In the cities of that region, there is a noticeable halt in the previous continuous downward trend in prices and number of transactions, which is directly related to the improvement in recent labor market conditions, the implementation of income-increasing tax measures, and the impact of rising wage levels on a large part of the local population.
Lower-income loan clients often take greater risks
Since lower-income households typically have to choose lower-priced assets when purchasing real estate, larger risks are noticeable among them as well. Each of us wants to live in quality residential space, the primary characteristic of which is usually the condition of the interior. However, for little money but with good to very good interior condition, residential space in Estonia can often be found in towns, small towns, and villages alike. In small areas, transaction activity and purchasing interest have increased noticeably over the past year, previously illiquid apartments' sales periods have shortened, and price growth has accelerated. Interest is shown specifically in apartments with more rooms, which are at higher prices in regional larger centers and which forces families with children to move out of the city.
Often the difference between the agreed transaction price and the market value of the asset is quite large, which is why they are forced to evaluate additional collateral belonging to parents, or transactions remain incomplete altogether. Very often, KredEx guarantee is used to reduce the down payment required for the loan. If in the interim period it was noticeable that some of the most well-known banks in Estonia often did not want to provide loans in many regions and for certain client profiles, then due to growing competition in certain segments of the banking market, loan offerings have improved somewhat according to real estate office clients. However, if trends on the real estate market were to unexpectedly change in the future, such regions would remain, similar to the period a decade ago, with the largest credit losses. The high-priced assets purchased during the boom period in towns and villages near small towns can still be seen at court bailiff auctions today. In other words, there are still people in Estonia for whom the events following the 2008 crisis are far from over.
Article source: Arco Vara
