Transcript Estonian housing market

Estonian housing market before euro adoption
Angelika Kallakmaa
Ene Kolbre
Tallinn University of Technology
Tallinn University of Technology
Estonia 2010
In the same time, when other EU countries deal with
government debt and public deficit problems,
Estonia fills Maastricht criteria
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Maastricht criteria
Maastricht criteria
Reference value
Estonia
Inflation rate
1,0%
-0,7 %
Participation in the
2 years
currency exchange rate
mechanism ERM II
The Estonian kroon has
been participating in
ERM II since 2004
The general
government deficit
Must be lower than 3% 1.7% of GDP
of GDP
Government debt
Must be less than 60%
of GDP
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7.2% of GDP
Economic situation
 During 2000 - 2007 Estonia’s 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
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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
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Average monthly gross wages and
salaries, 1st quarter 2006– 1st quarter 2010 (EUR)
1st quarter
2nd
quarter
3rd
4th quarter
quarter
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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Year
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”
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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 sector’s reaction to the economic
upturn indicates some rise of procyclical
optimism”
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Loans granted to individuals
(stock, Mln EEK)
140000
120000
100000
80000
Loans to individuals
housing loans
60000
40000
20000
0
31.12.00 31.12.01 31.12.02 31.12.03 31.12.04 31.12.05 31.12.06 31.12.07 31.12.08 31.12.09
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Loans granted to individuals during a
month 2000-2010
Loans to individuals
5000
4500
4000
3500
3000
2500
Loans to individuals
2000
1500
1000
500
0
11/30/00 10/31/01 09/30/02 08/31/03 07/31/04 06/30/05 05/31/06 04/30/07 03/31/08 02/28/09 01/31/10
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Campell (2006)
 Household’s 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 don’t own the living space – more
then half of them don’t 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 don’t 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
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 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
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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
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Individuals loans and deposits
140000
120000
100000
80000
Deposits of individuals (stock)
60000
Loans to individuals
40000
20000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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Overdue loans and overdue housing loans
(1997-2009 annual basis, 2010 monthly basis)
12000
8000
6000
4000
2000
0
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
31 20 0
9
.0
1.
28 2 01
0
.0
2.
20
31 10
.0
3.
30 1 0
.0
4.
10
mln EEK
10000
Overdue amount of loans
Overdue amount of housing loans
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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
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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
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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 4045%
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Real estate purchase and sales
transactions 2000-2010
80000
70000
60000
50000
Number of contracts
40000
Value of contracts (mln EEK)
30000
20000
10000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
0
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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 )
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Average gross monthly wages and average
price for a square metre of a two-room
apartment in Tallinn (EEK)
Average gross monthly wages and average price for a square meter
of a two-room apartement in Tallinn (EEK)
30000
25000
EEK
20000
15000
10000
5000
0
2000
2001
2002
2003
2004
2005
Gross Wages and Salaries
2006
2007
Price per 1m2
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2008
2009
Number of square meters of a two-room apartment in
Tallinn obtainable for average gross monthly wages
Number of square meters of two-room apartment in Tallinn obtainable for average
gross monthly wages
1,20
1,00
0,80
0,60
0,40
0,20
0,00
2000
2001
2002
2003
2004
2005
2006
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2007
2008
2009
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
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Granted building permits and completed
dwellings (new construction)
14000
12000
10000
8000
granted building permits
6000
completed dwellings
4000
2000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Dwelling completions by type of
owner (new construction)
5000
4500
4000
3500
3000
Local governement
2500
private person
2000
other owner
1500
1000
500
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
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2009
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: [email protected]
 Ene Kolbre
 School of Economics and Business Administration,
Tallinn University of Technology
 e-mail: [email protected]
Tallinn University of Technology