Since the fall of last year, the local real estate market has been in a figurative staring contest. Sellers don’t give much of a price, and buyers are not willing to buy at the current price – they look each other in the eye and no deals take place. Exceptions are transactions that have been previously agreed upon or arise from practical necessity. Currently and in the future, eight important variables affect the real estate market, which do not give much optimism in the near future.
First, we saw a significant economic downturn (almost 4%) over the past year. Today, the situation is somewhat stabilizing, but by the end of the year it will still be difficult to reach the level of the beginning of last year. It is clear that the current multiple crisis is more painful for households and companies than the corona crisis was.
Second, there has been less demand in the real estate sector due to the decline in household purchasing power, which is recovering very slowly. Wage growth has not been able to keep up with price growth. Real income decreased by 12% in one year until last September and has since recovered by only a few percent. The poor have been hit particularly hard, as most of their expenses go to household and food. The proposed VAT increase will also raise prices and reduce incomes. Income tax reform brings relief to middle-income earners, but low purchasing power still reduces the willingness to buy a new home.
Thirdly, the expenses related to the home have practically doubled: from a bill of one hundred euros in May 2021, an average bill of 185 euros has now become. If the costs related to the home seemed high during the corona crisis, looking back at that time now, they were rather small compared to now. During the corona crisis, you dreamed of a bigger home and an extra room, but not anymore. The desire to improve one’s living conditions has been pushed to the background for now. However, those who managed to change their home to a bigger one may now be scratching their heads due to the increased costs.
Fourthly, it can be seen that the increase in Euribor hits families with loans hard, and it has also reduced the amount left for daily expenses. Household debt is about 40% of GDP. If the euribor rises to 4%, the interest costs of households will increase by 1.6% of GDP. This is money that could previously be spent on daily consumption. Since at the same time interest rates on term deposits have also increased, many savers thereby also reduce the size of the loss to the entire economy. However, the unexpectedly high price increase and the increased level of long-term interest rates have overall made loan payments more expensive – as a result, interest in saving rather than buying real estate is growing. In the end, the saved money also reaches the real estate sector, but with a very long delay.
Fifth, low unemployment allows people to repay loans, but even so, the situation is already difficult for those who have recently taken out loans. Fortunately, the issue is more about the options that have to be given up in order to service the loan, and not about not having money in the account on payday. Downsizing and individual companies closing their doors will result in personal pain, but with the current labor shortage, unemployment will rise little.
Sixth, the price of construction has increased significantly as a result of the environmental requirements set for new real estate. Unfortunately, when buying a new home, one is often not sure what one is buying, i.e. one does not know whether the energy efficiency stated on paper will turn out to be effective and affordable in reality. There is also no certainty as to whether the current housing will still meet environmental requirements in 20 years and in which direction and how harsh conditions will be brought by a sudden green turn.
Seventh, real estate prices have increased by a third more than construction prices. Construction prices have increased by 35% since the end of 2019, but real estate prices have increased by 47%. The increased price of real estate can be partly explained by the added requirements for new real estate, while the price of old real estate is not directly dependent on the construction price. In general, however, it is worth remembering that construction prices can also fall: materials can become cheaper, and foreign labor can make construction cheaper in the future.
Eighthly, it can be said that those who bought a new home before the beginning of 2021 can be happy. The value of their property has increased significantly. Loan customers do have to shell out more money for interest payments, but the value of the property has increased much more than it has been necessary to pay in the form of added interest payments. However, those who bought real estate later may be in a difficult situation. They have large loans with high interest payments, but at the same time the value of the property has not increased.
All in all, real estate prices exceeded the reasonable level of purchasing power by 25% last summer, because real estate price growth was 47% compared to the pre-corona level and wage growth was 22%. This is the difference that needed to be adjusted to restore the purchasing power of the wage earner’s property. In addition, the rapid rise of the Euribor has brought real estate prices down. To date, the purchasing power of real estate has improved, and we have regained half of the lost 25% – since last September, real estate prices have fallen by 10% and wages have risen by 7%. The impact of Euribor on current and future borrowers continues to be noticeable and will continue for some time to come, but according to current indications, clients could still return to the property market in 2024.
Fly to Uusküla
Chief Economist of Luminor