Martynas Stankevicius. A Healthy Normalisation of the Real Estate Market
In recent months, the "crisis" in the Lithuanian housing market has been louder than ever and the decade of zero interest rates, the roller coaster ride of the last few years, and the post-pandemic overheating are often forgotten. It is therefore more accurate to consider the current situation as a normalisation, a respite and a preparation for a lower-than-today but positive and sustainable Euribor.
Against a background of rising interest rates and a slower economy, the housing market has stabilised. "According to Inreal, the primary market in Vilnius has been steadily selling around 200 apartments per month all this year, while the stock of new housing has been holding steady at around 4,500. Both of these figures look bleak when compared to, for example, the spring of 2021, when more than 1,000 apartments were sold per month in Vilnius out of a stock of only 3,000. But historically speaking, a stock of 4,500 apartments in the capital is a long-term average, and up to 300 new apartments per month were sold in certain months in 2017-2018 - a time of a healthy and growing economy but zero interest rates.
The real "crisis" was in the aftermath of 2021, when, due to the huge demand, the pause in construction in 2020 and the change in building permit procedures, we again saw supply not keeping up with demand, "off-plan" purchases, compromises on quality and other signs of overheating. This was not sustainable, and it is unwise to compare today's statistics with that period.
A sign of a recovering market is that a large portion of the official new apartment inventory is not "under construction" but already built. Consequently, fewer new projects are being launched. However, this doesn't mean that real estate developers have stopped; they are actively working on designing projects and obtaining permits for future construction.
Thus, today's market has inventory to sell and is ready to respond flexibly to any new demand growth, which will inevitably occur once the Euribor rate starts to decrease. Unlike after the pandemic, such flexibility will prevent an uncontrollable supply shortage and a new price spike.
Regarding housing prices, major developers like "Hanner" publicly state that higher sales are not being hindered by prices, but by high interest rates. While historically more than half of homes in Lithuania are purchased without loans, a 4% Euribor rate limits the ability to borrow at all, significantly increases monthly payments for those with loans, essentially disrupts the "investment property with a loan" model, and cools the entire market.
"Our analysis shows that the main reason why people are holding back from buying apartments is the very high interest rates and loan payments," said Arvydas Avulis, Chairman of the Board of "Hanner," in September, whose company began offering new clients the possibility of not paying interest to the bank for a few years.
Prices themselves have stabilized this year, but expectations of a significant correction have not materialized. Only in isolated cases or when clearing out inventory have "discounts" of 5–10% been seen this year. Some developers offer promotions with free storage rooms, parking spaces, or solar panels. With rising wages and costs, developers have little room to reduce prices, but they remain acceptable and affordable to the market, if not for the interest rates.
"A crisis or price correction in the construction sector is unlikely, nor are there any indications of such in the land market, and wages continue to rise. So I don't really see an objective possibility of reducing housing prices," also said Sigita Survilaite-Mekioniene, CEO of "Darnu Group", to the media this month.
The concept of a "healthy" or "historical" Euribor is generally ungrateful. Over nearly 25 years of the euro's existence, the European Central Bank (ECB) has had to manage and revive the dot-com boom and recession of the early 2000s, the major recession of 2007–2010, and the subsequent decade-long sovereign debt crisis, which accustomed us to zero interest rates. Therefore, historical data does not even allow us to predict what a sustainable and long-term Euribor should be. However, the market and the central bank itself are communicating that the current 4% interest rate is primarily a tool for controlling inflation. No one doubts that once inflation is controlled, Euribor will decrease, most likely as early as next year, but expecting a return to the era of zero interest rates is also difficult. At this point, a logically and sustainably sound rate would be, for example, 2%, corresponding to the ECB's long-term inflation target, but also signaling that money must have a cost.
In any case, what is happening in the housing market today signals its return to a sustainable development path. Housing sales have already stabilized and take us perhaps only to early 2018, not several decades back. The inventory of built housing is stable, sustainable, and no longer flooded with new supply, but developers are well-prepared for new construction as soon as sales start to grow more significantly. There will likely be no significant correction or new price surges due to supply and demand imbalances. All of this is due to a balanced inventory.
This situation may disappoint speculators and opportunists, but a sustainable and objectively grounded sector is most beneficial to the majority of its driving force: buyers and investors.
Martynas Stankevicius. A Healthy Normalisation of the Real Estate Market
In recent months, the "crisis" in the Lithuanian housing market has been louder than ever and the decade of zero interest rates, the roller coaster ride of the last few years, and the post-pandemic overheating are often forgotten. It is therefore more accurate to consider the current situation as a normalisation, a respite and a preparation for a lower-than-today but positive and sustainable Euribor.
Against a background of rising interest rates and a slower economy, the housing market has stabilised. "According to Inreal, the primary market in Vilnius has been steadily selling around 200 apartments per month all this year, while the stock of new housing has been holding steady at around 4,500. Both of these figures look bleak when compared to, for example, the spring of 2021, when more than 1,000 apartments were sold per month in Vilnius out of a stock of only 3,000. But historically speaking, a stock of 4,500 apartments in the capital is a long-term average, and up to 300 new apartments per month were sold in certain months in 2017-2018 - a time of a healthy and growing economy but zero interest rates.
The real "crisis" was in the aftermath of 2021, when, due to the huge demand, the pause in construction in 2020 and the change in building permit procedures, we again saw supply not keeping up with demand, "off-plan" purchases, compromises on quality and other signs of overheating. This was not sustainable, and it is unwise to compare today's statistics with that period.
A sign of a recovering market is that a large portion of the official new apartment inventory is not "under construction" but already built. Consequently, fewer new projects are being launched. However, this doesn't mean that real estate developers have stopped; they are actively working on designing projects and obtaining permits for future construction.
Thus, today's market has inventory to sell and is ready to respond flexibly to any new demand growth, which will inevitably occur once the Euribor rate starts to decrease. Unlike after the pandemic, such flexibility will prevent an uncontrollable supply shortage and a new price spike.
Regarding housing prices, major developers like "Hanner" publicly state that higher sales are not being hindered by prices, but by high interest rates. While historically more than half of homes in Lithuania are purchased without loans, a 4% Euribor rate limits the ability to borrow at all, significantly increases monthly payments for those with loans, essentially disrupts the "investment property with a loan" model, and cools the entire market.
"Our analysis shows that the main reason why people are holding back from buying apartments is the very high interest rates and loan payments," said Arvydas Avulis, Chairman of the Board of "Hanner," in September, whose company began offering new clients the possibility of not paying interest to the bank for a few years.
Prices themselves have stabilized this year, but expectations of a significant correction have not materialized. Only in isolated cases or when clearing out inventory have "discounts" of 5–10% been seen this year. Some developers offer promotions with free storage rooms, parking spaces, or solar panels. With rising wages and costs, developers have little room to reduce prices, but they remain acceptable and affordable to the market, if not for the interest rates.
"A crisis or price correction in the construction sector is unlikely, nor are there any indications of such in the land market, and wages continue to rise. So I don't really see an objective possibility of reducing housing prices," also said Sigita Survilaite-Mekioniene, CEO of "Darnu Group", to the media this month.
The concept of a "healthy" or "historical" Euribor is generally ungrateful. Over nearly 25 years of the euro's existence, the European Central Bank (ECB) has had to manage and revive the dot-com boom and recession of the early 2000s, the major recession of 2007–2010, and the subsequent decade-long sovereign debt crisis, which accustomed us to zero interest rates. Therefore, historical data does not even allow us to predict what a sustainable and long-term Euribor should be. However, the market and the central bank itself are communicating that the current 4% interest rate is primarily a tool for controlling inflation. No one doubts that once inflation is controlled, Euribor will decrease, most likely as early as next year, but expecting a return to the era of zero interest rates is also difficult. At this point, a logically and sustainably sound rate would be, for example, 2%, corresponding to the ECB's long-term inflation target, but also signaling that money must have a cost.
In any case, what is happening in the housing market today signals its return to a sustainable development path. Housing sales have already stabilized and take us perhaps only to early 2018, not several decades back. The inventory of built housing is stable, sustainable, and no longer flooded with new supply, but developers are well-prepared for new construction as soon as sales start to grow more significantly. There will likely be no significant correction or new price surges due to supply and demand imbalances. All of this is due to a balanced inventory.
This situation may disappoint speculators and opportunists, but a sustainable and objectively grounded sector is most beneficial to the majority of its driving force: buyers and investors.
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