Expert Explains: Why Real Estate Prices in Estonia Haven't Fallen as Much as People Expected
According to Igor Habal, a board member of Estonia's largest real estate office Uus Maa, three factors are keeping real estate prices up in Estonia, and these will continue to affect the market this year as well.
According to Igor Habal, real estate prices in Estonia have fallen less than the European average. "Last year's statistics reflected earlier transactions to a significant extent in the new developments category, which distorted the actual situation, but in reality the average decline was 5%-7%. At the same time, Germany saw real estate price declines of up to 10% and Sweden even 10%-15%. Considering that Estonia has the deepest economic downturn in the eurozone, people expect greater changes in real estate as well, but three important economic factors are working against this," said Habal.
"The first reason is the strong state of the labor market. Unemployment has increased slightly and is currently at 8%, and due to layoffs at the beginning of the year it could reach ten percent, but in reality the more important side of the coin is high employment. Nearly 700,000 people earn wages, which has grown by close to 50,000 in recent years, and on a larger scale the labor market has held up well," added Habal.
"The central banks' goal in raising Euribor was to cool the economy and inflation, which has worked to a certain extent, but it has not collapsed the economy. The economy is functioning, but at a slower pace. Considering that our main target markets such as Finland and Sweden will likely see economic decline this year, Estonia's economy has actually done quite well and people can pay their loans. Distressed sales comparable to the 2007-2008 real estate crisis are not currently happening, and this has kept both the market and prices stable," said Habal.
According to the board member of Uus Maa, the second reason for price stability is people's relatively low debt-to-income ratio. "According to the Bank of Estonia's regulation, banks must account for the fact that at the time of obtaining a home loan, a person's total loan obligations should not exceed 50% of net income. Estonia's total population debt-to-income ratio was at 55% in 2022, and in the European context this is quite a safe indicator (the EU average is 71.5%), which also suggests that the likelihood of people falling behind on loan payments is quite small. In Finland and Germany, the debt ratio is over 70% and for example in Sweden over 170%. This shows that in other countries loans are given and taken more easily and people's net assets tend to fall into the negative, meaning the total amount of obligations exceeds the value of assets," said Habal.
"Also, in Estonia the self-financing for real estate acquisition is relatively high – on average 67% is taken as a loan and one-third is purchased from own funds. Meanwhile, the Bank of Estonia would allow loans to be issued with only a 15% down payment, which shows that people do not want to use the maximum allowed rate when obtaining a home loan. This keeps loan obligations lower and therefore people have less need to sell in difficult times," said Habal.
"Although real estate is Estonia's national sport – on a per capita basis Estonia's real estate market has been one of Europe's most active over the last 20 years, the loan obligations we have taken are reasonable. Currently, residential loans are only held by 30% of owners who are affected by high Euribor. Both individuals and banks learned from the 2007-2008 crisis and did not easily take on excessively large obligations," added Habal.
According to Igor Habal, as the third key factor keeping real estate prices up is general high inflation, which actually also means a real depreciation of real estate prices that have nominally remained at the same level. "Last year inflation was over 9%, while the median apartment price rose statistically by 5% – this means that in real terms there was a price decline, which will continue this year as well," said Habal.
