Estonian housing market - before euro adoption

1
Estonian housing market - before euro adoption

• Angelika Kallakmaa
• Ene Kolbre
• Tallinn University of Technology

2
Estonia 2010

• In the same time, when other EU countries deal
  with government debt and public deficit problems,
  Estonia fills Maastricht criteria

3
Maastricht criteria
Maastricht criteria Reference value Estonia
Inflation rate 1,0 -0,7
Participation in the currency exchange rate mechanism ERM II 2 years The Estonian kroon has been participating in ERM II since 2004
The general government deficit Must be lower than 3 of GDP 1.7 of GDP
Government debt Must be less than 60 of GDP 7.2 of GDP
4
Economic situation

• During 2000 - 2007 Estonias output growth was
  faster than in most emerging market economies
• Since 2008, the economy has been experiencing a
  hard landing period
• Restored growth in Estonian exports will be
  balanced economic situation in Estonia in the
  second half of 2010

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Economic background and forecast
  2006 2007 2008 2009 2010 2011 2012
GDP () 10,0 7,2 -3,6 -14,1 1,0 4,0 3,3
Private consumption expenditure () 13,0 9,1 -4,8 -18,9 -5,6 1,6 3,8
Unemployment rate (ILO) () 5,9 4,7 5,5 13,8 16,0 14,5 13,2
Real wage growth () 10,4 12,0 4,3 -3,8 -4,2 0,1 1,9
Average gross wage growth () 16,2 20,4 13,8 -4,6 -3,8 1,2 3,2
Nominal credit growth () 51,6 30,2 7,3 -6,4 -2,4 2,3 3,8
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Employment

• Housing boom increased employment in the real
  estate and related sectors
• At the end of the growth period, the economy
  reached the stage of full employment
• After real the estate boom the unemployment rate
  skyrocketed
• The unemployment level will probably remain high
  over the next years

7
The wages and salaries

• The average gross wages and salaries have
  decreased, but the decrease slowed down in the
• 1st quarter 2010
• The real wages,which took into account the
  influence of the change in the consumer price
  index, decreased 2.6 in the 1st quarter 2010

8
Average monthly gross wages and salaries, 1st
quarter 2006 1st quarter 2010 (EUR)
  1st quarter 2nd quarter 3rd quarter 4th quarter Year
2006 549 609 580 653 601
2007 660 738 697 784 725
2008 788 850 800 838 825
2009 776 813 752 783  
2010 758        
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Information asymmetries between borrowers and
lenders

• When economic conditions are depressed and
  collateral values are low, information
  asymmetries can mean that even borrowers with
  profitable projects find it difficult to obtain
  funding
• When economic conditions improve and collateral
  values rise, these firms are able to gain access
  to external finance and this adds to the economic
  stimulus.
• This explanation of economic and financial cycles
  is often known as the financial accelerator

10
Procyclicality effect

• During an economic boom financial sector
  inclines to strengthen the impact of a business
  cycle through intensifying lending activity
• and vice versa

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Männasoo 2003

• Since 2001, the growth in loans has accelerated
  again, reaching markedly high speed in 2002
• The share of provisions has decreased and this
  has supported in keeping capitalisation high
• The banking sectors reaction to the economic
  upturn indicates some rise of procyclical
  optimism

12
Loans granted to individuals (stock, Mln EEK)
13
Loans granted to individuals during a month
2000-2010
14
Campell (2006)

• Households behaviour is difficult to measure and
  they are not always fully rational when they
  making financial decisions
• Households make investment mistakes, given the
  complexity of their financial planning problem
  and the often confusing financial products that
  are offered to them

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Questionnaire 2010 April

• Purpose
• Evaluate the access to bank loans during the
  housing boom time
• Expectations about real estate market movements

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Questionnaire 2010 April

• There were 350 repliers (287 female, 62 male)
• 57 are owners of their living space, others
  live with parents or rent
• Persons who dont own the living space more
  then half of them dont plan to buy real estate
  in the next years
• (Reason 34 real estate prices are still too
  high, 45 disposable income is too low to take a
  loan)

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Credit availability to households housing loans

• 43 of repliers found that it was too easy to
  get loan from banks
• 19 bank condition was that loan must be taken
  jointly with another person
• Only 1 answered that bank asked too high self
  financing amount

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Influence for consumption

• 45 housing loan repayment amount is 30 of
  disposable income
• 30 of repliers found that increase in interest
  rates will make their loan payments difficult
  (part of repliers did not answer at all)
• 6 said they have difficulties in everyday life
• Only 2 of repliers are ready to sell their
  property when they have difficulties with loan
  payments

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Conclusions

• It is common to own your living space, not to
  rent it
• Access to bank credit was too easy during the
  real estate boom
• Clients with problems dont want to renounce
  their property, only 2 admit to the possibility
  of selling their flat or house
• Not owners are not planning to buy, they
  preferred to live with parents or rent the living
  space
• Housing loans have an important influence to the
  consuming activity

20

• There was the procyclical effect in lending
  activity
• Credit risk was underestimated in the boom time
• It seems to be that the overheating was stronger
  than the downturn

21
According to the Estonian institute of economic
research

• In 2009 was the consumer confidence lowest of
  all the survey period (since 1992)
• 48 of consumers assesses that the economic
  situation of their household was worse then a
  year ago
• Only 4 had a better situation

22
Individuals loans and deposits
23
Overdue loans and overdue housing loans
(1997-2009 annual basis, 2010 monthly basis)
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Overdue loans

• The stock of overdue loans did not change much
  in 2010
• The share of housing loans overdue by more than
  60 days increased, reaching 4.6
• Improvement in the quality of the loan portfolio
  is a time-consuming process, which will take
  years even if economic activity picks up

25
Housing finance market activity remained sluggish

• demand for housing loans is low
• ( irrespective of the relatively low price level
  of real estate)
• The stock of new housing loans issued within the
  April 2010 was 13 smaller than the average
  level of 2009

26
Housing market

• Prices of apartments started to rise rapidly in
  2005 when the annual price rise was over 50
• The growth rate of transactions started to slow
  down in the middle of 2006
• The price rise turned to decline in 2007 when the
  housing prices reached the maximum
• Average price fall since spring 2007 has been
  40-45

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Real estate purchase and sales transactions
2000-2010
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Housing demand

• Total volume of housing loans has increased as a
  result of low interest rate and tight competition
  in the banking sector
• The rise in housing market was mostly driven by
• consumers expectations (stories of unprecedented
  price increases etc)
• easy access to credit (housing loan standards )

29
Average gross monthly wages and average price for
a square metre of a two-room apartment in Tallinn
(EEK)
30
Number of square meters of a two-room apartment
in Tallinn obtainable for average gross monthly
wages
31
Housing supply

• In 2004-2006 demand for housing was greater than
  supply
• Since the beginning of 2007 supply started to
  grow rapidly
• Since 2008 supply has been greater than demand

32
Granted building permits and completed dwellings
(new construction)
33
Dwelling completions by type of owner (new
construction)
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Conclusions (1)

• Real estate prices are very cycle-sensitive
• It is difficult for banks to follow more prudent
  policies during an economic upturn, especially in
  a highly competitive environment
• The supervisory pressure on banks seems also to
  be procyclical (if real estate prices are rising,
  loan portfolio is rising, banks declare good
  earnings - it is very difficult to explain
  concerns with such situations)

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Conclusions (2)

• Households budgets are tighten
• Borrowers have postponed their investment and
  consumption decisions despite of low interest
  rate
• If demand improves, credit growth can be expected
  to pick up no sooner than in the second half of
  the year 2010
• Loan losses have increased less than anticipated
  in last year forecasts
• Improvement in the credit portfolio quality of
  banks will take time

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Conclusions (3)

• Adoption of euro - the signals are contradictory
• demand is low, but experts speak about the first
  signs of recovery on the real estate market
  (Eurozone membership will give easier access to
  European capital markets)
• Some euro-area countries are experiencing a
  government debt crisis, uncertainties have arisen
  in the external environment
• The bottom of the Estonian real estate market is
  approaching, although the shape of this bottom is
  expected to be flat, which means a long
  vegetating in all economy

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Thank you!
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Authors

• Angelika Kallakmaa
• School of Economics and Business Administration,
  Tallinn University of Technology
• e-mail angelika.kallakmaa_at_tallinnlv.ee
• Ene Kolbre
• School of Economics and Business Administration,
  Tallinn University of Technology
• e-mail ekolbre_at_tseba.ttu.ee