Estonia's housing market remains strong
February 15, 2018
Estonia’s housing market remains strong, fuelled by low interest rates, moderate to good rental yields, as well as robust economic growth. During the year to October 2017 the average price of apartments in Tallinn increased 8.56% (4.6% inflation-adjusted) to €1,763 per square metre (sq. m), an improvement from the price rises of 5.11% in the same period the prior year, according to OberHaus.
The national figures released by Statistics Estonia showed more modest house price increases. The average price of Estonian dwellings rose nationally by 4.74% (0.98% inflation-adjusted) during the year to Q3 2017, from y-o-y rises of 4.8% in Q2 2017, 7.73% in Q1 2017, 7.72% in Q4 2016 and 7.38% in Q3 2016. Quarter-on-quarter, apartment prices increased 3.34% in Q3 2017 (2.39% inflation-adjusted).
Over the same period, house prices rose by 6.18% (2.36% inflation-adjusted) while apartment prices increased 4.19% (0.45% inflation-adjusted).
All of the country’s major cities experienced robust house price rises during the year to Q3 2017, according to Statistics Estonia:
- In Tallinn, Estonia’s capital, the average price of apartments increased 4.38% (0.63 inflation-adjusted), after rising by 8% y-o-y in the same period the prior year.
- In Tartu City, the second largest city and the intellectual capital of Estonia, apartment prices rose by 7% (3.17% inflation-adjusted), up from just 1.76% growth a year earlier.
- In Parnu City, the country’s summer capital, located in the southwestern, apartment prices rose by 6.05% (2.25% inflation-adjusted), after rising by 19.63% a year earlier.
- In Estonia excluding Tallinn, apartment prices rose by 10.63% (6.67 inflation-adjusted), after a y-o-y rise of 7.05% in Q3 2016.
New apartments cost around €2,300 to €5,000 per sq. m. in the city centre and €1,500 to €2,200 per sq. m. in the residential districts, based on figures from OberHaus.
Demand and supply continue to surge. In 2017, the number of purchase-sale contracts stood at 51,780 units, up by 9.3% from a year earlier and the highest level since 2006, according to Estonian Land Board. Likewise, the value of contracts also increased 13.5% to €3.24 billion over the same period. In Tallinn, the number of purchase-sales contracts increased 11% while the value of contracts surged 17.8%.
Dwelling completions soared by 24.6% y-o-y to 5,895 units in 2017 while building permits climbed 32% y-o-y to 7,947 units.
Estonia’s economy grew by about 4.3% in 2017, sharply up from an expansion of 2.1% in 2016 and the fastest growth in five years, according to the country’s central bank, Bank of Estonia. The economy is projected to grow by 4.2% this year and by another 3.1% in 2019.
Foreign individuals and companies are allowed to acquire real estate with the permission of the local authorities. There are legal restrictions on acquiring agricultural and woodland of 10 hectares or more, and permission from the county governor is needed. Foreign individuals are not allowed to acquire land located in smaller islands, or listed territories adjacent to the Russian border.
A short history of the Estonian property cycle
Estonia’s housing market was in continuous boom from 2000 to 2007. The average price of 2-room flats in Tallinn rose by 448.7% from 2000 to 2007, in Tartu prices rose 431.5% and in Parnu 440%. Prices of three-room flats were equally impressive, rising 412% in Tallinn, 481% in Tartu, and 471.5% in Parnu.
Demand for properties in Tallinn reached an all-time high in 2006, with foreigners attracted by the city’s potential. Tallinn accounted for more than half of all real estate transactions in Estonia.
Meanwhile owner-occupancy rates rose strongly, up from 85% in 2002, to 96% in 2004. The rental market shrank from 12% of households (with 9% privately renting and 3% in social rents) in 2002, to just 4% in 2004.
Then came the crash. Estonia’s house price falls in 2008 were among the biggest in the world, rivaled only by Latvia. Prices of dwellings started to fall nationwide in 2007, partly due to the global financial meltdown:
- In 2007, house prices dropped by 1.5% (-9.7% inflation-adjusted)
- In 2008, house prices plunged by 18.3% (-24.5% inflation-adjusted)
- In 2009, house prices plummeted by 30.5% (-29.1% inflation-adjusted)
Recovery began in the second half of 2010, with the average price of dwellings rising modestly by 4.1% (-1% inflation-adjusted).
- In 2011, house prices soared by 12.3% (7.9% inflation-adjusted).
- In 2012, house prices rose by 5.4% (1.6% inflation-adjusted).
- In 2013, house prices surged 14.5% (12.9% inflation-adjusted).
- In 2014, house prices rose by 8.46% (8.95% inflation-adjusted).
- In 2015, house prices rose by 8.07% (8.68% inflation-adjusted).
- In 2016, house prices rose by 9.74% (8.35% inflation-adjusted).
Estonia’s housing market is expected to remain robust this year, on the back of a stronger economy and falling unemployment, according to local property experts.
Property demand is surging
In 2017, the number of purchase-sale contracts stood at 51,780 units, up by 9.3% from a year earlier and the highest level since 2006, according to Estonian Land Board. Likewise, the value of contracts also increased 13.5% to €3.24 billion over the same period.
- In Tallinn, the number of purchase-sales contracts increased 11% while the value of contracts surged 17.8%.
- In Tartu, the number of purchase-sale contracts rose by 2.3% while the value of contracts was almost unchanged.
- In Parnu, the number of purchase-sale contracts rose by 1.2% while the value of contracts surged 16.3%.
- In Estonia, excluding Tallinn, the number of purchase-sale contracts increased 8.6% while the value of contracts rose strongly by 9.2%
Moderate to good rental yields
Gross rental yields from apartments in Tallinn are moderate to good, ranging from 5.3% to 6.3%, according to Global Property Guide research. This was supported by OberHaus, whose research finds that gross rental yields of apartments in Tallinn ranged from 5% to 5.5%, depending on location and the quality of the property.
Smaller apartments tend to earn higher rental returns. A 40 sq. m. apartment has moderate to good rental yields at 6.3%, whereas a 120 sq. m. apartment earns somewhat poorer rental yields at 5.3%.
The average rent for a 40 sq. m. apartment in Tallinn was €384 per month, whereas for a 120 sq. m. apartment, monthly rents were around €1,145 in September 2017, according to Global Property Guide. Average rents per sq. m. are around €9.4 per month.
Construction activity continues to increase
After the break-up of the Soviet Union in 1991, housing construction in Estonia dramatically decelerated. In 2001 housing construction began to pick up, peaking at around 7,000 per year in 2007, but after the financial crisis completions slumped to around 2,000 per year.
Dwelling completions began to rise in 2014, growing by 32.5% y-o-y to about 2,756 units, then soaring in 2015 44% to 3,969 units and in 2016 by another 19.2% to 4,732 units.
In 2017, dwelling completions surged again by 24.6% from the previous year, to 5,895 units.
Mortgage market expanding
The house price boom was supported by a massive expansion of the mortgage market, growing by an average of 62% yearly from 2002 to 2006. After 2007, the mortgage market collapsed.
In 2014, housing loans outstanding rose by 2.9% from a year earlier, and total value of outstanding housing loans has risen by 4.4% in 2015 and by another 5.4% in 2016, based on figures from the Bank of Estonia.
In December 2017, the value of housing loans outstanding rose strongly by 6.8% to about €7.14 billion from the same period last year.
The size of the mortgage market is currently equivalent to 31.3% of GDP.
Mortgage rates gradually rising
While mortgage interest rates remain relatively low, they are now rising gradually. In December 2017, the average interest rate on outstanding housing loans was 1.77%, slightly up from 1.69% a year earlier, according to the European Central Bank (ECB).
By original maturity:
- Up to 1 year: 1.88% in December 2o17, up from 1.7% a year earlier
- Over 1 and up to 5 years: 5.24% in December 2o17, up from 4.71% a year earlier
- Over 5 years: 1.73% in December 2o17, slightly up from 1.66% a year ago
In September 2014, the ECB slashed the key rate to a record low of 0.05%. Then in March 2016 the ECB cut again the key rate to zero where it has remained since.
Strong economic growth, falling unemployment
Estonia’s economy grew strongly by about 4.3% in 2017, the fastest growth in five years, according to the country’s central bank, Bank of Estonia .
The economy is projected to grow by 4.2% this year and by another 3.1% in 2019.
From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually, including resounding 10.4% GDP growth in 2006, and 9.5% growth in 2005. In 2007, GDP growth was 7.9%, one of the highest growth rates in the EU. Unemployment fell from 13% in 2000, to just 4.6% in 2007.
The economy contracted by a staggering 14.7% in 2009 after the financial crisis. It a recovered with astounding growth of 7.6% in 2011, with strong exports. Unemployment fell to 12.3%. Then in 2012, the economy expanded by a robust 5.2%, bolstered by construction and export growth.
However the economy slowed sharply in 2013, with real GDP growth rate of just 1.6%, mainly due to weak exports and rising inflation. It grew by 2.9% in 2014 and by just 1.1% in 2015, mainly due to a sharp slowdown in the electronics sector and shale oil sector, and a decline in demand from neighboring Russia. In 2016, Estonia’s economy expanded by a very modest 1.6%. As a result, unemployment increased to 6.8% in 2016, according to Statistics Estonia.
In 2017, the jobless rate fell to 5.8%, the lowest level since 2008, as reforms encourage pensioners to reenter the labor market.
In Q3 2017, average monthly gross wages and salaries stood at €1,201, up from €1,146 in 2016 and €1,065 in 2015, according to Statistics Estonia.
In 2016, average monthly gross wages and salaries rose 7.6% to €1,146 from a year earlier, according to Statistics Estonia.
Nationwide inflation accelerated to 3.4% in 2017, up from 0.1% in 2016, -0.5% in 2015, -0.1% in 2014, and 2.8% in 2013. Consumer prices are projected to increase by 3.1% this year and 2.6% in 2019, according to the European Commission.
Estonia has the lowest national debt level in the European Union, at just about 8.7% of GDP in 2017, down from 9.6% of GDP in 2016. In 2017, the country was estimated to have registered a balanced budget, from surpluses of 0.3% of GDP in 2016, 0.1% in 2015 and 0.7% in 2014.