New Housing Availability Deteriorates as Creditworthiness Decreases
According to the latest Financial Stability Report of the Bank of Latvia, the availability of new housing is significantly deteriorating due to a decrease in the creditworthiness of potential borrowers. The report highlights that the increase in wages is lagging behind the increase in the prices of new housing, and the rise in interest rates on housing loans is further increasing the cost of servicing the loan.
SIA “Arco Real Estate” has assessed that the average price of new projects in Riga in 2022 was 18% higher than in 2021. In comparison, the average net salary in the country only increased by 7% during the same period, resulting in a real decrease of 8.8%. This disparity between wages and housing prices is contributing to the affordability crisis.
Furthermore, the statistics from the Bank of Latvia reveal that the average interest rate for new home loans has increased by 2.4 percentage points from January 2022 to January 2023. This increase in interest rates further adds to the financial burden of potential homebuyers.
The creditworthiness of borrowers remained relatively good at the end of 2022. However, in 2023, the availability of new homes with medium and large areas in Riga is expected to deteriorate. A simplified assessment shows that households with a total income equivalent to two average net salaries in the country were able to purchase an apartment with housing loan financing in January 2021, with an area of 111.6 m2 in a new project in Riga. However, by the fourth quarter of 2022, the area of the new apartment available to such households had decreased to 86 m2.
As housing prices and Euribor rates continue to rise in 2023, middle-income households will only be able to afford apartments with an area of less than 70 m2 by mid-2023. This shrinking affordability is evident in the decline in the number of new housing reservations and activity in the apartment market of Riga’s new projects at the beginning of 2023. Larger apartments, such as three or four-room units, are becoming increasingly unattainable for all but the wealthiest households.
The deteriorating availability of new housing poses significant challenges for individuals and families looking to purchase a home in Riga. The gap between wages and housing prices, coupled with rising interest rates, is making it increasingly difficult for middle-income households to afford suitable housing. This issue requires attention and potential solutions to ensure that housing remains accessible for all segments of society.
How is the decrease in creditworthiness affecting individuals’ ability to qualify for housing loans and afford new homes?
Ecline in affordability. This widening gap is making it increasingly difficult for individuals to qualify for housing loans and afford new homes.
The report suggests that the decrease in creditworthiness is mainly driven by the rising debt-to-income ratio of potential borrowers. With the increase in housing prices outpacing wage growth, individuals are finding it harder to save for a down payment and meet the necessary income requirements needed to secure a housing loan. Additionally, the rise in interest rates is exacerbating the situation by adding additional costs to the loan, making it even less affordable for borrowers.
The impact of this deteriorating housing availability is being felt most prominently in the capital city of Riga. As one of the most sought-after locations for new housing projects, the rising prices are significantly outpacing the wage growth in the region. This has resulted in a limited supply of affordable housing options, with many potential buyers unable to meet the financial requirements to purchase a new home.
The situation is concerning for both individuals and the overall housing market. Access to affordable housing is essential for economic stability and social well-being. Without the ability to purchase new homes, individuals and families may be forced to settle for less desirable housing options or delay their plans to become homeowners altogether.
The report acknowledges that addressing this issue will require a multi-faceted approach. Efforts to increase wages, promote responsible lending practices, and implement supportive housing policies will be necessary to improve the creditworthiness of potential borrowers and ensure more affordable housing options are available in the market.
In conclusion, the availability of new housing is deteriorating in Latvia, largely due to a decrease in creditworthiness among potential borrowers. Rising housing prices and interest rates, combined with slower wage growth, have resulted in a significant affordability gap. This situation poses challenges for individuals and the broader housing market, underscoring the need for comprehensive measures to improve creditworthiness and increase access to affordable housing options.
The dwindling supply of new housing in Latvia, exacerbated by declining creditworthiness and surging prices, presents worrisome challenges for its residents, who are increasingly burdened by limited options and unaffordability. Urgent measures are needed to address this pressing issue and ensure sustainable housing opportunities for all.