Rising inflation raises concerns about the availability of housing in the near future

On an annual basis, the housing affordability index increased in Vilnius, but decreased in Riga and Tallinn. At the beginning of this year, low interest rates supported affordability, but this was not enough to improve it in Riga and Tallinn on an annual basis – growth in house prices in these Baltic capitals outpaced wage growth. In Vilnius, meanwhile, wages grew faster than prices and the index rose year-on-year. It is noteworthy that, compared to the fourth quarter of last year, the housing affordability index decreased in all Baltic capitals. Despite the fluctuations, the index indicates that with the current market conditions and the assumptions of the index methodology, residents of all Baltic capitals can still afford housing in the average household.

The data show that in the first quarter, the average price in Riga increased by 8.9%. It should be recalled that transactions are still recorded with a time lag. Statistics show transactions that have already been completed, not current apartment bookings. Rapidly rising construction costs have significantly pushed up reservation prices, with the result that price increases for new dwellings in the first quarter of this year were likely to be faster than the data show (+ 4.9%). In some cases, the period between the booking and the completion of the transaction can be as long as two years.

The average salary continued to rise at the beginning of this year. However, much of the growth is beginning to be eaten up by rapidly rising consumer prices. The purchasing power of the population is expected to decline this year, but the recovery period is expected only next year at best. As inflation takes effect, the amount of free funds available to the population decreases. Combined with uncertainty about the extent of future price increases, some people may be in a hurry to buy housing now, fearing further price increases. This may be due to a temporary increase in market activity, followed by a slowdown.

The war in Ukraine has contributed to rising inflation around the world. As a result, the world’s central banks, including the European Central Bank (ECB), are raising interest rates to fight rising prices. Most mortgages in the Baltics include variable interest rates. Rising interest rates are raising the cost of servicing mortgages, which could reduce people’s willingness to increase their existing debt or take on new debt. Scenarios have been developed in this housing affordability index to model changes in housing affordability as a result of rising interest rates. Scenarios suggest that housing affordability will decline significantly, but will remain affordable. The third or risk scenario, the probability of which is very low, indicates that housing will become unavailable in Vilnius and Tallinn. The average home in Riga remains affordable, but in this scenario, apartments in new project buildings are becoming inaccessible.

Rising construction prices will push up house prices, but wage growth is unlikely to be as strong as last year. Rising inflation is reducing real wages and free labor. An increase in interest rates will increase the cost of servicing a mortgage loan. Rising monthly mortgage payments will put additional pressure on the declining purchasing power of the population. As a result of these factors, improvements in the housing affordability index are unlikely to be recorded in the near term.

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