Activity in the housing market is shrinking due to the deterioration of the solvency of households and the availability of new housing, according to the Financial Stability Report of the Bank of Latvia.
The supply of energy-efficient homes has increased slightly, putting downward pressure on their prices. At the same time, the supply of new housing is insufficient for a long time, and their price growth is accelerating. The rapid rise in construction costs will further weaken the availability of new housing, explains the Bank of Latvia.
According to the report, the activity in the Latvian real estate market is decreasing due to the deterioration of the solvency of households and the availability of new housing. In April 2023, the number of real estate purchases was 15.2% less than in the corresponding period of the previous year.
The drop in activity is particularly sharp in Pieriga, where the number of purchases in February fell to the lowest figure of 2020 and recovered only slightly in March-April. In the opinion of the Bank of Latvia, this could be explained by a significant drop in the number of private houses and construction land purchases. The number of apartment purchases decreased moderately.
The data analysis of the largest advertisement platforms carried out by the Bank of Latvia reflects well the trends in housing supply. According to this analysis, the supply of serial and special project apartments has increased slightly, putting downward pressure on their prices.
Fluctuations in the supply and prices of energy-efficient housing further emphasize the need to significantly increase the pace of building renovation, emphasizes the Bank of Latvia. Due to the increase in energy prices, households living in energy-inefficient housing are exposed not only to significantly higher energy costs, but also to a decrease in the value of the housing as an important asset. The pace of renovation of multi-apartment buildings so far has been very slow, the Bank of Latvia admits.
The Financial Stability Report of the Bank of Latvia states that in order to increase the pace of renovation, it is important to increase the financing available for renovation, reduce the variability of financing, increase the capacity of the construction industry, develop the building renovation industry and promote the awareness of citizens. Similar to elsewhere in Europe, state funding alone is not enough to restore the housing stock, and a more active involvement of the private sector is also needed.
After strengthening the capacity of the construction industry and increasing the funding available for renovation, in the opinion of the Bank of Latvia, additional financial incentives for renovation (without not applying real estate tax discounts) should also be considered.
New housing construction is sluggish, further constrained by continued rapid increases in construction costs and caution by housing developers. According to the data of the Central Statistics Office (CSB), the total area of new housing commissioned in 2022 increased by 23% compared to the record low figure in 2021, but was 5.6% and 19.4% lower than in 2020 and 2019, respectively. year.
According to the estimates of SIA “Colliers International Advisors”, the number of apartments put into operation in Riga and Pierīga in 2023 could be less than in 2022. Market observations show that housing developers have become more cautious when starting the implementation of new projects, due to concerns about the amount of construction costs and their volatility, as well as the purchasing power of households.
The growth rate of qualitative and affordable housing stock in Latvia has been sluggish for a long time, the Bank of Latvia admits. Promotion of the offer still requires solving several structural deficiencies, for example, bureaucratic obstacles to construction1, shadow economy, lack of adequate workforce in the regions.
The increase in prices in the housing market in general is slowing down, but the trends are very different in different segments of the housing market. The report states that in the fourth quarter of 2022, the CSB housing price index was 9.1% higher than in the corresponding period of the previous year, but in quarterly terms, prices decreased by 0.2%. Due to lower demand and a growing supply of serial apartments, the annual growth rate of existing housing prices is decreasing, while the increase in new housing prices is accelerating.
In addition, the rapid increase in construction costs continues to drive up new housing reservation prices. It is expected that the growth of new housing prices will remain strong this year, predicts the Bank of Latvia.
According to the operative information of the analysis of advertisements carried out by the Bank of Latvia, there are no significant corrections in housing prices at the beginning of 2023. As housing prices in 2022 are growing faster than wages on average, the availability of housing in general has slightly worsened, but it is still at a historically high level. However, the availability of new housing is deteriorating rapidly.
Activity in the new home segment overall may moderate slightly due to reduced availability, but the risks of significant house price corrections are low. Accordingly, the housing market does not pose significant risks to financial stability, the Bank of Latvia states, explaining that in Latvia, unlike several EU countries, the imbalance of the housing market did not grow significantly, lending has been cautious and household debt is low.
The correction risks in the new housing segment are additionally limited by the long-term weak supply. The Bank of Latvia predicts that the tendency to buy more compact housing could increase due to the decrease in availability.
After the fluctuations caused by the global consequences of the hostilities in Ukraine, in the spring of 2022, the rental offer and rental prices in Latvia have stabilized. According to the data of the “cenubanka.lv” website, the number of rental offers and their average price did not change significantly at the end of 2022 and the beginning of 2023. The rental offer in Riga at the beginning of 2023 was generally slightly higher than in 2020-2021 on average, mainly due to a larger supply of serial apartments. The rise in rental prices in Riga has subsided.
2023-06-28 13:48:31
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