- Housing affordability has bottomed out.
- Interest rates for new loans likely peaked in the fourth quarter.
- The sustained rapid net wage growth is the key factor in the recovery of affordability.
Housing affordability finally started to improve in Riga and Vilnius in the final quarter of 2023. The index for Tallinn seemingly just bottomed out; however, with one-off factors removed, housing affordability also began to recover in the Estonian capital. Nevertheless, since mid-2023, only Riga’s residential apartments remain affordable for the average household. A closer look reveals that apartments built or renovated after 2000 in Riga have also been beyond the reach of the average household for a while now. Conversely, the subindex for Tallinn’s secondary market has regained affordability after a short dip in the third quarter.
Activity in the housing market remained muted. The number of transactions was low across the Baltics, as were reservations for new apartments. Real estate developers are cautious and trying to avoid an oversupply. General consumer confidence has improved in Latvia recently, remaining slightly below the long-term average, while in Lithuania households continue to be optimistic. Meanwhile, on the back of a prolonged recession, household confidence in Estonia has again deteriorated lately. Except for Soviet-era housing in Riga, prices generally have shown their resilience to lower market activity.
Our forecast for the start of the ECB’s rate cuts was pushed back from April to June. After that, we expect rate cuts at every ECB governing council meeting, with the deposit rate falling to 2.75% at the end of this year. Wage growth, although slowing, will remain high and should outpace any possible changes in housing prices. Therefore, we expect housing affordability to continue improving in 2024, with declining rates speeding up the process in the second half of the year. Market activity is also expected to pick up more pronouncedly as potential buyers see interest rates decline.
