"Latio": The housing market in 2009 and forecasts for 2010

Riga, January 12th, 2010
"Latio"

The low credit rating of Latvia, the economic and political situation, and the operation of banks continued to affect the decline of real estate prices in 2009. A price decline and low activity of market participants, reflected in a low number of transactions and decreased offer, can be observed in all segments of the real estate market. The price decline is particularly sharp in the land market and housing rental market, while stabilization is observed in the sale prices of apartments in Riga. Considering the insecurity and low purchasing power of the people, 2010 will most likely be a year of rental activity. Overall, the rate of price decline has slowed in the end of the year, which allows predicting that 2010 will bring price stabilization in all segments.

The effect of the operation of credit institutions
Due to the lasting economic decline, the real estate market in 2009 saw a continuation of the fall of transaction activity, offer and demand, and property prices. The generous crediting of the market growth years has been replaced by serious crediting limitations. With the number of clients in financial difficulty increasing, the capital sufficiency of banks is worsening, as well. The scope of crediting has shrunk considerably – commercial banks take back more loans issued to households than they grant new ones. Practically, during the whole year of 2009, 30–40 million LVL per month were removed from the economy, in contrast to the “fat years”, when at least 150 million LVL were granted in credits each month.  

In 2009, the commercial banks that were actively granting credits during the “fat years”, and are today suffering losses because of them, have founded associated companies – funds or so-called “bad banks”, which take over problematic assets connected with real estate.

Government regulations
In 2009, the government did not succeed in finding a balance of responsibility between borrowers, the state and creditors in case of insolvency.
Several changes implemented by legislators and national authorities in regulations connected with construction and planning of territorial development will make these procedures simpler and allow estimating the time required for official coordination of projects. 
The application of property tax to dwelling space from 2010, as well as the introduction of a capital gains tax, should be considered a step in the right direction, albeit one coming at an inopportune and difficult moment for the payers.

The lowest point has been reached
The lowest point in the apartment sales market was reached in the summer of 2009, with the average apartment price in Riga reaching 490 EUR/sq. m., marking a 71.5% fall from the highest price point in the spring of 2007 (1720 EUR/sq. m.). In 2009, the average apartment price in Riga has fallen by 40%. After two years of declining prices, price stabilization has been observed in this segment. The current price level is that of 2004, before the rapid growth of real estate prices that lasted for more than two years.

Price increase in the housing market
An increase of prices was observed in the fourth quarter of 2009 in some segments of the housing market. The average apartment price in Riga in the end of 2009 experienced a 9% increase compared to the summer, reaching 538 EUR/sq. m.
Real estate is again becoming an investment object, but foreign investors are still waiting on the sidelines due to the high risk. This trend is likely to continue in 2010, as well.
The price increase is explained by the limited offer, rather than by increasing market activity and growth of demand.
In the last quarter of 2009, the number of transactions still has not increased, and is by 67% lower than in 2007. In only 5–10% of purchase transactions do buyers take a loan from credit institutions. The majority of transactions are made in cash.
In the segment of new projects, the prices have not declined considerably during the year. Some project developers that could afford to lower their prices, thanks to having no loan obligations with banks, did so, and sold out their projects. Others, putting their hopes on the reduced number of offers, are still holding their prices. There is demand in the new projects segment in the outer districts and outer centre at the price level of 900 EUR/sq. m. for fully finished apartments, while the average offer level is at 1200 EUR/sq. m.