Housing Affordability Index for BalticsMeasures how well households can afford their purchases of apartments in the three ...
Components of the HAI: apartment prices, interest rates, and wagesApartment pricesFrom the third quarter to the fourth qua...
Annual percentage rate of charge for new mortgages to households               8.0%                                       ...
Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –decreased by 2.9 points in Vi...
Housing affordability index: methodPurpose                 Measure changes in household buying power, primarily as this re...
Appendix 1                   Housing affordability        Months to save for the                          index           ...
Economic Research DepartmentSwedenCecilia Hermansson             +46 8 5859 7720   cecilia.hermansson@swedbank.seGroup Chi...
DisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Department. The Economic Re...
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Housing Affordability Index for Baltics - March 15, 2012

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Housing Affordability Index for Baltics - March 15, 2012: The housing affordability index (HAI) increased to 145.6 in Riga and 154.3 in Tallinn, but decreased to 101.7 in Vilnius

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Housing Affordability Index for Baltics - March 15, 2012

  1. 1. Housing Affordability Index for BalticsMeasures how well households can afford their purchases of apartments in the three Baltic capitals 15 March, 2012The housing affordability index (HAI) increased to 145.6 in Riga and154.3 in Tallinn, but decreased to 101.7 in Vilnius  During the fourth quarter of 2011, housing affordability strengthened the most in Tallinn: 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 144.2 in the third quarter to 154.3. Over the same period, the HAI in Riga increased less, from 141.5 to 145.6, while in Vilnius it dropped from 103.4 to 101.7. This means that in the fourth quarter households’ net income from wages in Tallinn was 54.3% -- and in Riga 45.6% and in Vilnius 1.7% -- more than needed to afford an apartment, according to our norm of 30% of net wages for mortgage costs.  In Tallinn, the affordability increase was fuelled by a seasonal increase in wages on a quar- terly basis. This positive impact was reinforced by acceleration in the fall in interest rates in the fourth quarter by 9 basis points. Housing prices, whose quarterly increase was only 0.2%, did not have a significant impact.  In Riga, the HAI rose mostly because of a 1.6% quarterly increase in net wages. The effect of a 1% decline in housing prices and a 2-basis-point decrease in interest rates had a positive, but lesser, effect on affordability.  In Vilnius, the main reason for the decrease of housing affordability was the sharp increase in apartment prices. Apartment prices in the fourth quarter increased by 4.9% over the third quarter; this increase outweighed over this period both the slight decline in interest rates on mortgages, from 3.93% to 3.91%, and the 2.9% increase in net wages.  The time needed to save for a down payment fell in Riga from 25.6 to 25 months and in Tal- linn - from 26.4 to 24.9 months, but increased marginally in Vilnius, from 36.1 to 36.7 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 156.4 154.3 Tallinn Riga Vilnius150 145.6140130 2005 109.3 66.5 69.6120 2006 76.3 60.3 56.5110100 101.7 2007 67.2 53.4 51.0 90 2008 86.6 77.8 55.3 80 Tallinn 70 2009 161.5 140.5 86.4 60 Riga 2010 160.4 137.3 103.2 50 Vilnius 40 2011 Q1 161.3 136.0 102.4 2005 2006 2007 2008 2009 2010 2011 2011 Q2 156.9 140.7 103.8 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 2011 Q3 144.2 141.5 103.4 Swedbank 2011 Q4 154.3 145.6 101.7 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
  2. 2. Components of the HAI: apartment prices, interest rates, and wagesApartment pricesFrom the third quarter to the fourth quarter of 2011, the price of apartments in Vilnius grew by 4.9%,and, in Tallinn, by 0.2%; however, it fell by 1% in Riga. On an annual basis, apartment prices fell onlyin Riga – the price of a standard apartment was 2.6% lower in Riga, but 7.2% higher in Vilnius and12.5% higher in Tallinn.In the fourth quarter, an average-sized, 55 sq. m. apartment was the most expensive in Vilnius, whereits price reached EUR 61,760. This same standard apartment cost EUR 58,889 in Tallinn andEUR 40,920 in Riga.In the last quarter of 2011 apartments’ prices in Riga were 48.3% of what they had been during thepeak. Prices in Vilnius and Tallinn recovered more and were respectively 67.2% and 64.6% of theirpeak.The slowest recovery among the Baltic countries -- in Latvia -- was caused by weaker demand. Thenumber of transactions in Riga, unlike in Vilnius or Tallinn, fell in the last quarter of 2011, comparedwith the same period in 2010. In addition to a rapid increase in net wages and lowest unemployment inthe Baltics, the strong price growth in Tallinn was also influenced by the lowest interest rates for mort-gages in the region. The introduction of the euro also made the country more attractive to foreign in-vestors. As a result, the number of transactions was up by 20% on average during 2010-2011 com-pared to the low-period of 2009. Meanwhile, in Riga, demand might have been suppressed by the an-nual increase in interest rates. 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 1,123 EUR 1,100 1,071 EUR 1,000 900 800 744 EUR 700 600 2005 2006 2007 2008 2009 2010 2011 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 Estonia, they declined by 9 basispoints to 3.68%, and in Lithuania and Latvia by 2 basis points, to 3.91% and 4.14%, respectively.These decreases are most likely related to the lowering of the ECBs policy rate in November and De-cember – as a result, the three-month euro interbank offered rate (EURIBOR) declined from 1.59% on1 November 2011 to 1.34% on 2 January 2012.Interest rates’ differentials remain the main reason why apartments are more affordable in Tallinn thanin Riga, as the difference between apartment prices and wages is similar in the two cities.2 Housing Affordability Index for Baltics • March, 2012
  3. 3. 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% 4.14% 4.0% 3.91% 3.68% 3.5% 3.0% 2005 2006 2007 2008 2009 2010 2011 Sources: National central banks and ECBAverage net wagesFrom the third quarter of 2011 to the fourth, the average net wages of households grew the least inRiga, by 1.6%. Vilnius households experienced a considerable increase of 2.9%. Meanwhile, house-holds in Tallinn faced a 6.1% increase in their income from wages, which might have also been partlyimpacted by seasonal factors. Nevertheless, the annual increase in wages was the highest in Tallinntoo with 7.4% and the average net household wage reaching EUR 1,182 in the last quarter. In Riga,net wages increased by 4.1% to EUR 819.6, and in Vilnius by 3.2% to EUR 840.7.As apartments’ prices rose quickly in Vilnius in the last quarter of 2011, the difference in affordabilitybetween Tallinn and Vilnius widened significantly. In Tallinn, households earned 40.6% more than inVilnius, while apartment prices in Estonian capital were 4.6% lower. Housing in Riga is also consid-erably more affordable than in Vilnius. Average net wage, EUR 800 788 EUR 750 700 650 600 560 EUR 550 546 EUR 500 450 400 Tallinn 350 Riga 300 Vilnius 250 200 2005 2006 2007 2008 2009 2010 2011 Sources: National statistical departmentsThe HAI value of 154.3 in Tallinn means that households’ income from wages in this city is 54.3%higher than required to afford an apartment, according to our norm (mortgage costs account for 30%of net wages of a household, which earns 1.5 of the average net wage). In Latvia, meanwhile, house-holds’ income from wages is 45.6% higher, and in Vilnius 1.7% higher than required to fulfil this norm.In the fourth quarter, mortgage costs amounted to 19.4% of households’ net wages in Tallinn, 20.6%in Riga, and 29.5% in Vilnius. This is a decrease by 1.4 and 0.6 percentage points in Tallinn and Riga,respectively, and an increase by 0.5 percentage points in Vilnius, compared with the previous quarter.Net income from wages of households in Vilnius needs to be at least EUR 826.4 to meet the norm ofaffordability (defined above). This required income is EUR 766.1 in Tallinn, which is lower as apart-ment prices and annual percentage rate of charge for mortgages is lower. Meanwhile, households inRiga, which enjoy the lowest apartment prices, have to earn only EUR 562.9 to afford an apartment.3 Housing Affordability Index for Baltics • March, 2012
  4. 4. Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –decreased by 2.9 points in Vilnius and by 6.6 points in Tallinn. This is because apartment prices in-creased faster in Tallinn (12.5% vs. 7.2%) and interest rates decreased less (4 basis points vs. 8 basispoints) even though wages increased more in Tallinn than in Vilnius (7.4% vs. 3.2%). Meanwhile, theincome margin in Riga widened by 7 points in a year. The fall in apartment prices (2.6%) and increasein net wages (4.1%) contributed to this improvement, while the increase in the interest rates by 14 ba-sis points restrained it.Months to save for a down paymentIn Tallinn and Riga, the number of months needed to save for a down payment, which equals 15% ofan apartment price, fell by 1.4 month to 24.9 month and 0.7 month to 25 months, respectively, fromthe third quarter to the fourth quarter. However, in Vilnius the number of months increased by 0.7month to 36.7 as apartments’ prices increased faster than net wages.It is assumed that 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 Vilnius 60 Riga 48.2 Tallinn 50 40 36.7 30 25.0 24.9 20 10 2005 2006 2007 2008 2009 2010 2011 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’ income would be too low, by 7.5%, to afford an apartment. Anincrease in apartment prices by 10% would cause the margin to decrease by 13.2 points in Riga andby 14 points in Tallinn, but the HAI would remain above 100 – at 132.4 and 140.3 in the respectivecapitals.The margins would disappear in each of three Baltic capitals if apartment prices were to increase by1.7 % in Vilnius, 45.6% in Riga, and 54.3% in Tallinn – i.e., by the amount of the current margins.Households would no longer be able to afford apartments if interest rates were to increase by morethan 0.14 percentage points in Vilnius, by more than 3.47 percentage points in Riga, and by more than3.95 percentage points in Tallinn.4 Housing Affordability Index for Baltics • March, 2012
  5. 5. 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 • March, 2012
  6. 6. Appendix 1 Housing affordability Months to save for the index downpayment 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 161.3 136.0 102.4 23.7 26.9 36.4 2011 Q2 156.9 140.7 103.8 24.4 26.1 36.1 2011 Q3 144.2 141.5 103.4 26.4 25.6 36.1 2011 Q4 154.3 145.6 101.7 24.9 25.0 36.7 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 116.5 96.7 75.0 32.9 39.0 48.0 Sources: National central banks, National statistical departments, Lithuanian Centre of Registers, Latvian State Land Service and National Real Estate Cadastre, Estonian Land Board, Swedbank6 Housing Affordability Index for Baltics • March, 2012
  7. 7. 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 EconomistElina 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 • March, 2012
  8. 8. 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 • March, 2012

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