Housing Affordability Index for Baltics - June 15, 2012
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Housing Affordability Index for Baltics - June 15, 2012

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Housing Affordability Index for Baltics - June 15, 2012: The housing affordability index (HAI) increased to 104.9 in Vilnius and 155.3 in Tallinn, but decreased to 136.8 in Riga

Housing Affordability Index for Baltics - June 15, 2012: The housing affordability index (HAI) increased to 104.9 in Vilnius and 155.3 in Tallinn, but decreased to 136.8 in Riga

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Housing Affordability Index for Baltics - June 15, 2012 Housing Affordability Index for Baltics - June 15, 2012 Document Transcript

  • Housing Affordability Index for BalticsMeasures how well households can afford their purchases of apartments in the three Baltic capitals 15 June, 2012The housing affordability index (HAI) increased to 104.9 in Vilniusand 155.3 in Tallinn, but decreased to 136.8 in Riga  During the first quarter of 2012, housing affordability strengthened the most in Vilnius: the housing affordability index (HAI) – which is calculated for a family whose income is equal to 1.5 of average net wages with an average-sized apartment of 55 sq. m. – increased from 101.8 in the fourth quarter last year to 104.9. Over the same period, the HAI in Tallinn in- creased less, from 154.5 to 155.3, while in Riga it dropped from 145.7 to 136.8. This means that in the first quarter households’ wages in Vilnius was 4.9% — and in Tallinn, 55.3%, and in Riga, 36.8% — more than needed to afford an apartment, according to our norm of 30% of net wages for mortgage costs.  In Vilnius, the affordability increase was fuelled by a decrease in interest rates of 32 basis points on a quarterly basis. This favourable change outweighed the seasonal fall in wages and rise in housing prices, as both them were slight.  In Tallinn, the HAI rose also because of a quarterly decrease in interest rates, which fell by 19 basis points. A higher increase in affordability was held back mostly by a 1.4% seasonal drop in net wages. A 0.4% increase in housing prices also had a negative, but smaller, effect on af- fordability.  In Riga, the main reason for the significant quarterly decrease of housing affordability was the considerable (4.8%) increase in apartment prices and 2.3% quarterly seasonal decrease in net wages. A modest decrease in interest rates had a positive — albeit smallest among the Baltic capitals — effect on affordability.  The time needed to save for a down payment increased in all three cities: in Riga, from 24.9 to 26.8 months; in Tallinn, from 24.9 to 25.3 months; and in Vilnius, from 36.7 to 37 months.  The HAI is 100 when households use 30% of their net wages for mortgage costs. When the HAI is at least 100, households can afford their housing, according to the established norm. The higher the number, the greater the affordability. Housing affordability index190 179.5180170160 156.4 155.3 Tallinn Riga Vilnius150140 136.8 2005 109.3 66.5 69.6130120 2006 76.3 60.3 56.5110 104.9 104.9 2007 67.2 53.4 51.0100 90 2008 86.6 77.8 55.3 80 Tallinn 2009 161.5 140.5 86.4 70 60 Riga 2010 160.4 137.3 103.2 50 Vilnius 40 2011 154.2 145.1 102.8 2005 2006 2007 2008 2009 2010 2011 2012 2012 Q1 155.3 136.8 104.9 Sources: National central banks, ECB, National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and Swedbank Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000 E-mail: ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720 Dainis Stikuts +371 67 445 844; Vaiva Šečkutė +370 2 582156; Annika Paabut +372 888 5440
  • Components of the HAI: apartment prices, interest rates, and wagesApartment pricesFrom the fourth quarter of last year to the first quarter of 2012, the price of apartments in Riga grew by4.8%; in Tallinn, by 0.4%; and in Vilnius, by 0.2%. On an annual basis, the price of an average-sized,55 sq. m. apartment in Tallinn rose by 13.9%; in Riga, by 8.5%; and in Vilnius, by 5.7%.In the first quarter of 2012, this standard apartment was the most expensive in Vilnius, where its pricereached EUR 61,862. This same apartment cost EUR 59,116 in Tallinn and EUR 42,843 in Riga.In the first quarter, apartment prices in Riga were 50.6% of what they had been during the peak.Prices in Vilnius and Tallinn were, respectively, 67.3% and 64.9% of their peak as the price correctionwas smaller in Vilnius and prices in Tallinn recovered the fastest from the lowest point.The slowest recovery of apartment prices among the Baltic countries – in Latvia – accelerated signifi-cantly in the first quarter of this year, as the annual change in housing prices moved from a 2.6% fall inthe last quarter of 2011 to an 8.5% increase. This must have been influenced by higher demandgrowth. However, apartment prices increased only in the Riga centre, not for the block houses. In anyevent, it is still hard to say whether the rise in apartment prices in Riga will be sustained as a pickup inactivity in the first quarter may reverse in the following months.The fastest, 13.9%, annual growth in housing prices — in Estonia — continues to be supported by thelowest unemployment and interest rates, and the highest annual net wage growth. As a result, thedemand in the housing market has recovered the strongest among the capitals, also partially sup-ported by higher foreign demand. Apartment prices, EUR/m2 1,800 1,671 EUR 1,700 1,657 EUR 1,600 Tallinn 1,541 EUR 1,500 Riga 1,400 Vilnius 1,300 1,200 1,100 1,125 EUR 1,075 EUR 1,000 900 800 779 EUR 700 600 2005 2006 2007 2008 2009 2010 2011 2012 Sources: Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and SwedbankInterest rates on mortgagesInterest rates decreased on a quarterly basis in all three countries. In Lithuania, they declined by 32basis points to 3.59%; in Estonia, by 19 basis points, to 3.49%; and in Latvia, by 6 basis points, to4.08%. Three-month euro interbank offered rate (EURIBOR) has decreased from 1.44% in the lastquarter of 2011 to 1.04% in the first quarter this year. Significantly slower decrease in interest rates inLatvia compared with Lithuania could be explained by somewhat increased margins in Latvia due togrown funding costs. Nevertheless, as the number of new mortgage deals is still at low levels in allcountries, the interest rates volatility is quite high.Interest rate differentials remain the main reason why apartments are more affordable in Tallinn thanin Riga. However, the ratio of wages to apartment prices worsened significantly in Riga in the firstquarter and became more unfavourable than in Tallinn. This ratio was similar in Riga and Tallinn in2011 as the recovery in Riga’s housing prices was very weak. However, this situation changed in thefirst quarter of this year.2 Housing Affordability Index for Baltics • 15 June, 2012
  • Annual percentage rate of charge for new mortgages to households 8.0% 7.8% 7.5% 7.0% 6.5% 6.5% 6.0% Estonia 6.4% 5.5% Latv ia Lithuania 5.0% 4.5% 4.0% 4.08% 3.59% 3.5% 3.49% 3.0% 2005 2006 2007 2008 2009 2010 2011 2012 Sources: National central banks and ECBAverage net wagesFrom the last quarter of 2011 to the first quarter of this year, the average net wages of households fellthe most in Riga, by 2.3%. Tallinn households experienced a 1.4% fall and wages in Vilnius decreasedby 0.6%. However, wages were decreasing due to seasonal factors and some lagged effects of nega-tive business sentiment at the end of 2011, and these are likely to fade away in the following quarters.In an annual comparison, wages rose in all three capitals – the increase was the highest in Tallinn,where growth reached 6.4% and the average net household wage was EUR 1,167 in the first quarter.In Vilnius, net wages increased by 3.8% to EUR 836, and, in Riga, by 3% to EUR 800.In the first quarter of this year, the interest rate difference in Lithuania compared with Estonia was thesmallest since the end of 2008, and the difference in affordability between Tallinn and Vilnius becameeven more dependent on the wage differences. In Tallinn, households earned 39.6% more than in Vil-nius, while apartment prices in the Estonian capital were 4.4% lower. Housing in Riga is also consid-erably more affordable than in Vilnius, as Vilnius households earn only 4.4% more than their counter-parts in Riga but pay 44.4% more in apartment prices. Average net wage, EUR 800 778 EUR 750 700 650 600 557 EUR 550 534 EUR 500 450 400 Tallinn 350 Riga 300 Vilnius 250 200 2005 2006 2007 2008 2009 2010 2011 2012 Sources: National statistical departmentsThe HAI value of 155.3 in Tallinn means that household net wages in this city is 55.3% higher thanrequired to afford an apartment, according to our norm (mortgage costs account for 30% of net wagesof a household that earns 1.5 of the average net wage). In Latvia, meanwhile, household net wages is36.8% higher, and in Vilnius 4.9% higher than required to fulfil this norm. In the first quarter, mortgagecosts amounted to 19.3% of households’ net wages in Tallinn, 21.9% in Riga, and 28.6% in Vilnius.Compared with the previous quarter, this is a decrease of 0.9 and 0.1 percentage points in Vilnius andTallinn, respectively, and an increase of 1.3 percentage points in Riga.3 Housing Affordability Index for Baltics • 15 June, 2012 View slide
  • Net wages of households in Vilnius needs to be at least EUR 796 to meet the norm of affordability (de-fined above). This required household net wages is EUR 752 in Tallinn, which is lower mostly due tolower apartment prices. Meanwhile, households in Riga, which enjoy the lowest apartment prices,have to earn only EUR 585 to afford an apartment – this is roughly one-forth less than in the othercapitals.Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –decreased by 6 points in Tallinn and by 7 points in Riga. This is because in Tallinn net wages in-creased more (6.4% vs. 3%) and interest rates fell more than in Riga (24 basis points vs. 2 basispoints), even though apartment prices increased faster in Tallinn (13.9% vs. 8.5%). Meanwhile, theincome margin in Vilnius widened by 2.6 points in a year. The fall in interest rates (35 basis points)and increase in net wages (3.8%) contributed to this improvement, while the rise in apartment pricesof 5.7% restrained it.Months to save for a down paymentIn Vilnius, Tallinn, and Riga, the number of months needed to save for a down payment, which equals15% of an apartment price, increased by 0.3 month to 37 months, 0.5 month to 25.3 months, and 1.8months to 26.8 months, respectively, from the last quarter of 2011 to the first quarter this year. Thiswas due to increasing apartment prices and a seasonal decrease in net wages in all three capitals.It is assumed that a household saves 30% of its net wages every month for a down payment. Months to save for a down payment 70 63.5 60.3 Tallinn 60 Vilnius 48.2 Riga 50 40 37.0 30 26.8 25.3 20 10 2005 2006 2007 2008 2009 2010 2011 2012 Sources: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board and SwedbankSensitivity analysisSensitivity analysis shows that, if apartment prices were to rise by 10%, the affordability margin woulddisappear in Vilnius and households’ net wages would be too low, by 4.6%, to afford an apartment. Anincrease in apartment prices of 10% would cause the margin to decrease by 12.4 points in Riga andby 14.1 points in Tallinn, but the HAI would remain above 100 – at 124.4 and 141.2 in the respectivecapitals.The margins would disappear in each of three Baltic capitals if apartment prices were to increase bymore than 4.9% in Vilnius, 36.8% in Riga, and 55.3% in Tallinn – i.e., by the amount of the currentmargins. Households would no longer be able to afford apartments if interest rates were to increase bymore than 0.39 percentage point in Vilnius, by more than 2.83 percentage points in Riga, and by morethan 3.97 percentage points in Tallinn, if other variables remained unchanged.4 Housing Affordability Index for Baltics • 15 June, 2012 View slide
  • Housing affordability index: methodPurpose Measure changes in household buying power, primarily as this relates to apartment purchases but also an indicator for existing housing.Norm Household mortgage costs, according to our definition, should not exceed 30% of net wages of a household.Definition of housingaffordability index Actual income in relation to income required to meet the “norm,” where mortgage costs account for 30% of net wages of a household. If the index = 100, households are using 30% of their net wages. If the index > 100, household buying power exceeds the norm. And if the index < 100, house- hold buying power is below the norm. The index is calculated according to the following formula: AverageINC HAI  *100 NINC where PMT NINC  . 30% HAI – housing affordability index AverageINC – 1.5 of average monthly net wages NINC – net wages that would satisfy the “norm” PMT – monthly mortgage paymentVariables  Three-month average prices of apartments of average size (55 sq. m.) in capitals  Average net wages of a household, equal to 1.5 of average monthly net wages in capital cities  Three-month average interest rates and other related charges (or an- nual percentage rate of charge - a rate that comprises an interest com- ponent and a component of other charges) for new housing loans to households issued in euros for Latvia and Estonia and weighted against different currencies (the litas and the euro) in Lithuania-- produce the monthly mortgage cost, assuming a 15% down payment and 30-year term.Limits The housing affordability index includes mortgage costs but excludes taxes and subsidies, including property tax and interest deductions. The index provides an indication of the situation for households composed of one or two working people, which, combined, earn one-and-a-half times the aver- age monthly wage; however, it does not reflect conditions for individual households. The index does not provide any direct guidance for business decisions, including lending and interest rate decisions. It reflects house- hold buying power, based on apartment purchases that have been made, but says nothing about opportunities for apartment sales. The housing affordability index is of an informative nature and reflects mac- roeconomic developments, rather than banks decisions and lending poli- cies or possible decisions made by individual households.Periodicity QuarterlyGeography Vilnius, Riga, Tallinn5 Housing Affordability Index for Baltics • 15 June, 2012
  • Appendix 1 Housing affordability Months to save for the index down payment Tallinn Riga Vilnius Tallinn Riga Vilnius 2005 Q1 113.7 64.4 72.6 32.7 50.0 46.7 2005 Q2 118.4 66.7 69.8 32.7 53.1 53.1 2005 Q3 105.2 66.4 75.2 37.4 53.5 50.9 2005 Q4 100.1 68.3 60.5 38.6 52.5 58.9 2006 Q1 84.2 60.0 58.6 44.0 57.6 62.8 2006 Q2 81.2 63.4 55.8 44.0 53.5 63.5 2006 Q3 70.4 57.9 58.6 48.2 56.3 58.3 2006 Q4 69.5 60.0 53.1 46.9 52.0 62.1 2007 Q1 65.5 53.0 54.4 47.8 57.4 59.1 2007 Q2 67.4 52.0 51.1 45.3 56.7 59.6 2007 Q3 62.6 47.5 50.0 46.9 60.3 59.1 2007 Q4 73.2 61.1 48.5 39.5 46.0 59.9 2008 Q1 80.5 70.5 54.1 37.3 40.7 55.3 2008 Q2 87.1 75.4 53.5 34.0 36.4 54.4 2008 Q3 83.3 80.0 54.4 33.5 31.9 51.7 2008 Q4 95.4 85.3 59.0 29.8 28.8 48.4 2009 Q1 129.6 116.8 68.8 25.6 25.1 44.1 2009 Q2 160.0 148.3 87.7 22.3 22.0 38.1 2009 Q3 179.5 140.7 93.9 20.6 25.1 36.3 2009 Q4 176.9 156.4 95.5 21.3 22.8 35.6 2010 Q1 160.5 138.5 100.6 23.1 26.3 35.3 2010 Q2 162.9 137.2 102.6 23.1 26.4 35.8 2010 Q3 157.3 134.8 104.9 23.9 27.2 34.9 2010 Q4 160.9 138.6 104.6 23.8 26.7 35.4 2011 Q1 161.3 143.8 102.4 23.7 25.4 36.4 2011 Q2 156.9 146.6 103.8 24.4 25.0 36.1 2011 Q3 144.0 144.3 103.4 26.4 25.1 36.1 2011 Q4 154.5 145.7 101.8 24.9 24.9 36.7 2012 Q1 155.3 136.8 104.9 25.3 26.8 37.0 High 179.5 156.4 104.9 48.2 60.3 63.5 Low 62.6 47.5 48.5 20.6 22.0 34.9 Average 117.8 98.6 76.0 32.7 38.5 47.6 Sources: National central banks, National statistical departments, Lithuanian Centre of Registers, Latvian State Land Service and National Real Estate Cadastre, Estonian Land Board, and Swedbank6 Housing Affordability Index for Baltics • 15 June, 2012
  • Economic Research DepartmentSwedenCecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.seGroup Chief EconomistChief Economist, SwedenMagnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.seSenior EconomistJörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.seSenior EconomistAnna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.seAssistantEstoniaAnnika Paabut +372 888 5440 annika.paabut@swedbank.eeChief Economist, EstoniaElina Allikalt +372 888 1989 elina.allikalt@swedbank.eeSenior EconomistLatviaMārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lvDeputy Group Chief EconomistChief Economist, LatviaDainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lvSenior EconomistLija Strašuna +371 67 445 875 lija.strasuna@swedbank.lvSenior EconomistLithuaniaNerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.ltChief Economist, LithuaniaLina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.ltSenior EconomistVaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.ltSenior Economist7 Housing Affordability Index for Baltics • 15 June, 2012
  • DisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Department. The Economic Research Depart-ment consists of research units in Estonia, Latvia, Lithuania, and Sweden, is independent of other departments of Swedbank AB (publ)(“Swedbank”) and responsible for preparing reports on global and home market economic developments. The activities of this researchdepartment differ from the activities of other departments of Swedbank, and therefore the opinions expressed in the reports are independ-ent from interests and opinions that might be expressed by other employees of Swedbank.This report is based on information available to the public, which is deemed to be reliable, and reflects the economists’ personal andprofessional opinions of such information. It reflects the economists’ best understanding of the information at the moment the researchwas prepared and due to change of circumstances such understanding might change accordingly.This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge this report is correctand accurate, however neither Swedbank nor any enterprise belonging to Swedbank or Swedbank directors, officers, or other employeesor affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws or faults within this report.Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report and provide financial services (issueloans, among others) to them. Aforementioned circumstances might influence the economic activities of such companies and the pricesof securities issued by them.The research presented to you is of an informative nature. This report should in no way be interpreted as a promise or confirmation ofSwedbank or any of its directors, officers, or employees that the events described in the report shall take place or that the forecasts turnout to be accurate. This report is not a recommendation to invest into securities or in any other way enter into any financial transactionsbased on the report. Swedbank and its directors, officers, or employees shall not be liable for any loss that you may suffer as a result ofrelying on this report.We stress that forecasting the developments of the economic environment is somewhat speculative in nature, and the real situation mightturn out different from what this report presumes.IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT SOLELY ON YOUR OWN RISK ANDARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTION INDE-PENDENTLY.8 Housing Affordability Index for Baltics • 15 June, 2012