Housing affordability improved in Tallinn and Vilnius, while remained nearly unchanged in Riga.- The ECB cut its interest rates by 25 basis points in June; further cuts will continue supporting affordability.
As expected, the ECB cut its interest rates in June for the first time since 2019. This has improved housing affordability in Tallinn and Vilnius, while interest rates have remained persistently high in Latvia. This, paired with an increase in the average price, led to nearly unchanged affordability in Riga, proving that the recovery might take a while. Affordability in the primary market remains particularly low in all three Baltic capitals.
Market activity remains muted. The number of monthly registered transactions has been largely declining since mid-2022 and in terms of market activity per capita Tallinn and Vilnius have fallen to the level of Riga. The stock of unsold new apartments is high and in Tallinn and Vilnius – rising. There has been some improvement in consumer confidence this year, but it remains very low in Estonia and below the long-term average in Latvia. Lithuania stands out in the region with upbeat consumer confidence, albeit that has not yet translated into higher market activity.
On a positive note – wage growth remained rapid, although some deceleration can be observed. With inflation at low levels (bar Estonia), this has led to a continued improvement in purchasing power. We forecast that the ECB will cut rates two more times this year, but a more tangible recovery in housing market is likely only next year.
