Housing Affordability Index for Baltics - December 14, 2011

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Housing Affordability Index for Baltics - December 14, 2011: The housing affordability index increased in Riga and Vilnius, but decreased in Tallinn

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Housing Affordability Index for Baltics - December 14, 2011

  1. 1. Housing Affordability Index for BalticsMeasures how well households can afford their purchases of apartments in the three Baltic capitals 14 December, 2011The housing affordability index (HAI) increased to 141.1 in Riga and105.2 in Vilnius, but decreased to 144.2 in Tallinn  During the third quarter of this year, 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 to 105.2 from 103.8 in the second quarter. The HAI in Riga increased less, from 140.7 to 141.1, while in Tallinn it dropped to 144.2 from the second quarter’s 156.9. This means that in the third quarter households’ income from wages in Vilnius was 5.2%--and in Riga 41.1% and in Tallinn 44.2%--higher than needed to afford an apartment, according to our norm of 30% of net wages for mortgage costs.  Although the main reason for the significant decrease of housing affordability in Tallinn was the sharp increase in apartment prices, seasonal wage fluctuations and somewhat higher in- terest rates and other related charges on new mortgages had an impact as well. Apartment prices in the third quarter increased by 3.4% from the second quarter, while interest rates and other related charges on mortgages were up slightly from 3.72% to 3.77%.  In Vilnius, the affordability increase was fuelled by a 1.9% drop in apartment prices on a quar- terly basis. The positive impact was diminished slightly by a rise in interest rates and other re- lated charges on mortgages of 4 basis points and 0.1% lower wages, compared with the sec- ond quarter.  In Riga, the HAI rose over the same period despite an increase in interest rates and other re- lated charges on mortgages; this increase was offset by lower apartment prices and higher wages.  The time needed to save for a down payment decreased marginally in Riga and Vilnius, to 25.7 and 35.4 months respectively, but increased in Tallinn by 2 months to 26.4 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 higher the affordability. Housing affordability index190 179.5180170 Vilnius Riga Tallinn160150 156.4 2005 69.6 66.5 109.3 144.2140 141.1 2006 56.5 60.3 76.3130120 2007 51.0 53.4 67.2110 105.2 2008 55.3 77.8 86.6100 90 2009 86.4 140.5 161.5 80 Vilnius 70 2010 103.2 137.3 160.4 Riga 60 2011 Q1 102.4 136.0 161.3 50 Tallinn 2011 Q2 103.8 140.7 156.9 40 2005 2006 2007 2008 2009 2010 2011 2011 Q3 105.2 141.1 144.2 Source: 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, 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
  2. 2. Components of the HAI: apartment prices, interest rates, and wagesApartment pricesIn the third quarter of this year, the price of apartments increased in Tallinn by 3.4%, but decreased inVilnius and Riga by 1.9% and 0.9%, respectively, compared with the previous quarter. Nevertheless,on an annual basis, apartment prices fell only in Riga – the price of a standard apartment was 1.6%lower in Riga, but 4.1% higher in Vilnius and 18% higher in Tallinn.In the third quarter, the average-sized apartment of 55 sq. m. apartment was the most expensive inTallinn, where its price reached EUR 58,751 and became higher than in Vilnius for the first time in fouryears. A standard apartment cost EUR 57,889 in Vilnius and EUR 41,333 in Riga.The main reason for the rising prices of apartments on an annual basis is the economic recovery,which has been the strongest in Estonia, as well as the lower interest rates, which have made hous-ing more affordable and thus pushed up prices. Falling unemployment and less uncertainty about fu-ture income could also have influenced buyers’ activity, although the number of transactions remainswell below the level of the boom years.In Estonia - where price growth has been substantially higher - an extra boost to rising prices, in ouropinion, has come from the strongly improved confidence. This, in part, is connected to the change-over to the euro, which has eliminated currency risk in the economy, possibly made borrowers moreoptimistic, and made the country more attractive to foreign investors. Apartment prices, EUR/m2 70 63.5 60.3 60 50 48.2 Vilnius Riga 40 35.4 Tallinn 30 26.4 25.7 20 10 2005 2006 2007 2008 2009 2010 2011 Source: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board, SwedbankInterest rates on mortgagesInterest rates and other related charges for new mortgages (annual percentage rate of charge) in-creased in the third quarter of this year the most in Latvia (from 4.07% in the second quarter to4.16%). In Estonia, these rates climbed by 6 basis points to 3.77% and in Lithuania by 4 points to3.93%. This growth in the annual percentage rate of charge for mortgages is most likely related to theincrease in the ECBs policy rate in mid-July (from 1.25% to 1.5%) and also to the higher risk premiumdue to the greater risk aversion in financial markets – as a result, the three-month euro interbank of-fered rate (EURIBOR) increased from 1.36% in the second quarter of 2011 to 1.51% in the third quar-ter.The affordability improvement in Riga was dampened because that city experienced the fastest in-crease in interest rates and other related charges. The index would have been by 3.8 points higherthan in Tallinn if Latvia had enjoyed the same rates as Estonia because the difference betweenapartment prices and wages was more favourable in Riga than in Tallinn.2 Housing Affordability Index for Baltics • December, 2011
  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% Lithuania 6.4% 5.5% Estonia Latv ia 5.0% 4.5% 4.16% 4.0% 3.93% 3.77% 3.5% 3.0% 2005 2006 2007 2008 2009 2010 2011 Source: National central banks, ECBAverage net wagesThe average net wages of a households grew slightly only in Riga, by 0.5%, from the second quarterof 2011 to the third. Meanwhile, households in Tallinn faced a 4.3% decrease in their income fromwages, but this was due only to seasonal factors. Vilnius households experienced a smaller decreaseof 0.1%. On a yearly basis, average net household wages in Tallinn increased the most, reachingEUR 1,115, 6.9% more than in the third quarter of 2010. In Riga, these wages increased by 4.1% toEUR 804.6, and in Vilnius by 2.4% to EUR 816.7.The higher housing affordability in Tallinn compared with Vilnius is mostly determined by the differ-ence in wages. In Tallinn, households earn 36.5% more than in Vilnius, while apartment prices arenearly on the same level. Average net wage, EUR 800 750 743 EUR 700 650 600 550 544 EUR 536 EUR 500 450 400 Riga 350 Vilnius 300 Tallinn 250 200 2005 2006 2007 2008 2009 2010 2011 Source: National statistical departmentsThe HAI value of 144.2 in Tallinn means that households’ income from wages in this city is 44.2%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 41.1% higher, and in Vilnius 5.2% higher than required to fulfil this norm.In the third quarter, mortgage costs amounted to 20.8% of households’ net wages in Tallinn, 21.3% inRiga, and 28.5% in Vilnius.Net income from wages of households in Vilnius needs to be at least EUR 776.7 to meet the norm ofaffordability (defined in paragraph above). This required income is lower in Tallinn (EUR 773.1), asslightly higher apartment prices are compensated for by a lower annual percentage rate of charge formortgages. Meanwhile, households in Riga, which enjoy the lowest apartment prices, have to earnonly EUR 570.2 to afford an apartment. However, at the moment, households in Vilnius enjoy wagesthat are similar to Riga’s and much lower than in Tallinn.3 Housing Affordability Index for Baltics • December, 2011
  4. 4. Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –increased by 6.3 points in Riga and 0.3 point in Vilnius. This is because apartment prices increasedfaster in Vilnius (4.1% growth vs. 1.6% decrease) and wages increased less (2.4% vs. 4.1%) eventhough interest rates and other related charges for mortgages fell more in Vilnius than in Riga (16 ba-sis points vs. 9 basis points). Meanwhile, the income margin in Tallinn narrowed by 13.2 points in ayear. This was caused by a rise in apartment prices so rapid (18%) that it could not be offset evenby a 6.9% increase in net wages, or by a drop in interest rates of 9 basis points. This is an oppositetrend from that in Riga, where average net wages increased while apartment prices shrank.Months to save for a down paymentIn Vilnius and Riga, the number of months needed to save for a down payment, which equals 15% ofan apartment price, fell by less than a month to 35.4 and 25.7, respectively, from the second quarterto the third quarter. However, this number increased by 2 months to 26.4 in Tallinn because of a si-multaneous rise in apartment prices and fall in wages on a quarterly basis. Nevertheless, it still takes 9months less to save for a down payment in Tallinn than in Vilnius.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 60 50 48.2 Vilnius Riga 40 35.4 Tallinn 30 26.4 25.7 20 10 2005 2006 2007 2008 2009 2010 2011 Source: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board, SwedbankSensitivity analysisSensitivity analysis shows that, if interest rates were to rise by 2 percentage points, the affordabilitymargin would disappear in Vilnius and households’ income would be too low, by 16.3%, to afford anapartment. An increase in interest rates of 2 percentage points would cause the margin to decrease by28.8 percentage points in Riga and by 29.7 percentage points in Tallinn, but the HAI would remainabove 100 – at 112.6 and 114.4 in the respective capitals.The margins would disappear in all three Baltic capitals if apartment prices were to increase by 5.2%in Vilnius, 41.1% in Riga, and 44.2% in Tallinn—i.e., by the amount of the current margins. House-holds would no longer be able to afford apartments if interest rates were to increase by more than 0.42percentage points in Vilnius, by more than 3.16 percentage points in Riga, and by more than 3.29 per-centage points in Tallinn.4 Housing Affordability Index for Baltics • December, 2011
  5. 5. Housing affordability index: methodPurpose Measure changes in household buying power primarily as relates to apart- ment purchases, but can also provide indications on 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. 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, which equal 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 compo- nent and a component of other charges) for new housing loans to house- holds issued in euros for Latvia and Estonia and weighted against dif- ferent currencies (the litas and the euro) in Lithuania-- produce the monthly mortgage cost, assuming a 15% down payment and 30-year termLimits 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. The index reflects household buying power based on apartment purchases that have been made, but says nothing about opportunities for apartment sales. The housing affordability index is of informative nature and reflects macro- economic developments rather than banks decisions and lending policies or possible decisions made by individual households.Periodicity QuarterlyGeography Vilnius, Riga, Tallinn5 Housing Affordability Index for Baltics • December, 2011
  6. 6. Appendix 1 Housing affordability Months to save for a index down payment Vilnius Riga Tallinn Vilnius Riga Tallinn 2005 Q1 72.6 64.4 113.7 46.7 50.0 32.7 2005 Q2 69.8 66.7 118.4 53.1 53.1 32.7 2005 Q3 75.2 66.4 105.2 50.9 53.5 37.4 2005 Q4 60.5 68.3 100.1 58.9 52.5 38.6 2006 Q1 58.6 60.0 84.2 62.8 57.6 44.0 2006 Q2 55.8 63.4 81.2 63.5 53.5 44.0 2006 Q3 58.6 57.9 70.4 58.3 56.3 48.2 2006 Q4 53.1 60.0 69.5 62.1 52.0 46.9 2007 Q1 54.4 53.0 65.5 59.1 57.4 47.8 2007 Q2 51.1 52.0 67.4 59.6 56.7 45.3 2007 Q3 50.0 47.5 62.6 59.1 60.3 46.9 2007 Q4 48.5 61.1 73.2 59.9 46.0 39.5 2008 Q1 54.1 70.5 80.5 55.3 40.7 37.3 2008 Q2 53.5 75.4 87.1 54.4 36.4 34.0 2008 Q3 54.4 80.0 83.3 51.7 31.9 33.5 2008 Q4 59.0 85.3 95.4 48.4 28.8 29.8 2009 Q1 68.8 116.8 129.6 44.1 25.1 25.6 2009 Q2 87.7 148.3 160.0 38.1 22.0 22.3 2009 Q3 93.9 140.7 179.5 36.3 25.1 20.6 2009 Q4 95.5 156.4 176.9 35.6 22.8 21.3 2010 Q1 100.6 138.5 160.5 35.3 26.3 23.1 2010 Q2 102.6 137.2 162.9 35.8 26.4 23.1 2010 Q3 104.9 134.8 157.3 34.9 27.2 23.9 2010 Q4 104.6 138.6 160.9 35.4 26.7 23.8 2011 Q1 102.4 136.0 161.3 36.4 26.9 23.7 2011 Q2 103.8 140.7 156.9 36.1 26.1 24.4 2011 Q3 105.2 141.1 144.2 35.4 25.7 26.4 High 105.2 156.4 179.5 63.5 60.3 48.2 Low 48.5 47.5 62.6 34.9 22.0 20.6 Average 74.0 94.9 115.1 48.4 39.5 33.2 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 • December, 2011
  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 • December, 2011
  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 • December, 2011

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