In the third quarter of this year, the housing affordability index decreased sharply in all Baltic capitals. Although wages have continued to rise, rapidly rising apartment prices and higher interest rates have reduced housing affordability.
“Swedbank” Baltic Housing Affordability Index (MPI) reflects the chances of an average family to afford to buy an apartment of 55 square meters with the help of a mortgage loan in one of the capitals of the Baltic states. Taking into account the average interest rate and the house price, the monthly debt payments are calculated and compared with the development of one and a half times the average net salary in the respective city.
On an annual basis, the housing affordability index has decreased significantly. Wage growth has lagged house price growth, which together with rising interest rates has had a negative impact on housing affordability. In Vilnius and Tallinn, the value of the housing affordability index decreased to 120.9 and 119.6 respectively. Although the availability of housing in Riga is much lower than before, it remains the highest among the Baltic capitals: the index value was 176.6 in the third quarter. Such an index value means that the income of a family whose income corresponds to 1.5 of the average net monthly salary in Riga and who wishes to buy an apartment of 55 m2 was 76.6% higher than it would be necessary to divert no more than 30% of household income.
The bank’s estimates show that the weighted average price of apartments in Riga increased by 12% in the third quarter. A slower growth rate was recorded for apartments in older houses (built before 2000). On the other hand, for apartments located in houses built or renovated after 2000, which are mostly more expensive than older apartments, the price increase accelerated. The availability of these apartments is also slightly lower: the index value was 125.8. It is likely that the acceleration in price growth was driven by transactions with new pre-booked apartments. The prices of these apartments are even higher and the availability of apartments is even lower.
Record high inflation and higher interest rates have added to the financial burden on households. More expensive credit services, as well as the cost-of-living shock and fears of recession have weakened public confidence. Buyers have become more cautious: Demand for housing declined in the third quarter. The number of transactions decreased by 6% compared to the third quarter of last year. In the first-time purchase market, the number of transactions decreased, as did the rate of booking of housing under construction. A decline in activity can also be observed in the secondary market. More persistent demand may still remain in relatively new projects on the secondary market, built or renovated after 2000: buyers who can no longer afford to buy newly built apartments are looking at these options. Conversely, cheaper Soviet-era housing has lost its appeal due to low energy efficiency. With heating bills threatening to rise, the owners were interested in selling them quickly. The supply of these houses for sale, especially the larger ones in terms of surface area, has grown considerably. Due to falling demand, apartment prices in Soviet-era houses have been declining for several months in a row.
Most likely, the increase in the weighted average price in the coming months will be further supported by transactions with pre-booked apartments of new projects, which are more expensive than the average house. However, amid the prevailing uncertainty, home prices could decline over the next year. Low demand and higher interest rates may result in a small price correction, around 5% or so. Naturally, price developments will differ in different segments. For example, we may not expect a price reduction for new designs. The high construction costs and the good financial situation of the real estate developers motivate not to lower the prices.
The average salary continued to climb in the third quarter. The net salary in Riga was 5.7% higher than a year ago. Although incomes rose, rapidly rising inflation reduced workers’ real wages and free funds. Next year, raising the minimum wage will contribute to growth in the average wage. In 2023, bsnka expects monthly gross wages to increase by 8.5%.
In 2022, wage growth lagged house price growth. This has led to a decline in housing affordability. Next year, this price-wage dynamic could change: the weighted average price of apartments will probably decrease, while the net wage will increase. Housing affordability will be constrained by rising interest rates, so the housing affordability index is likely to fluctuate.
