Statistics: Mortgage Interest Rate in Estonia at a Record Low

According to Tõnu Toompark’s Estonian property Adaur blog, morgage rates in Estonia have fallen to a level of 3.15 per cent at the end of the first quarter of 2012. The only other time when such a low level of domestic rates was reached was back in 2005, writes Tõnu

And whilst interest rate margins have steadily grown over the last year, the falling Euribor rate of European banks’ lending rates has contributed to the overall decline in Estonian banks’ interest rates.

The current prognosis would have it that a low Euribor looks in the offing, and as a result, continuing low interest rates, writes Tõnu.

Meanwhile loans to businesses stood at a rate of 4.17 per cent at the end of the first quarter of 2012, Tõnu goes on.

This is a translation for Tallinn Property and Goodson & Red Estonian property consultancy, and the original article (in Estonian) is available on Tõnu Toompark’s Estonian property Adaur blog here, complete with detailed graphs going back to 1998 and showing changes in Euribor rates, as well as interest rates within Estonia in Kroons and Euros (and also Deutschmarks since the Estonian Kroon was initially pegged to the German Mark after its inception in 1992) as well as the margin, i.e. the difference between the Euribor rate and the Estonian banks’ own interest rate.

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Estonian Property Owners’ “Golden Handcuffs”

The proportion of property owners in Estonia seems to be declining somewhat, despite a strong desire in Estonia to be a property owner, according to a report in Estonian business newspaper Äripaev. The article, by Silvia Kruusmaa, goes on to say that this may actually have a positive dimension, due to its impact on both the rental and labour markets.

During the peak years of 2001-2005, the percentage of householders who were home owners was calculated at 90 per cent; however this dropped by some three per cent up to 2009, according to the article. Nonetheless, in world terms the proportion of homeowners is still high, writes Silvia.

Whilst Estonians clearly prefer to be owners than renters, a large proportion of home ownership can be bad for an economy, she says.

The European countries where the strongest impact on the real estate market has been felt are those where high levels of ownership are to be found, including Estonia, Latvia and Lithuania, writes Silvia.

Meanwhile, a high proportion of homeowners are dependent on the real estate sector for their jobs, and countries with a fast growing rate of ownership also tend to have fast growing rates of unemployment, Silvia goes on.

Furthermore, Silvia writes, unemployed homeowners are effectively tied to the biggest investment of their life, ie. real estate, and thus have less job mobility.

According to Swedbank financial affairs private information manager Piret Suitsu, to ensure an active rental market and the provision of different living places, it is necessary to have a more mobile labour market, and at the same time enable people to have a greater satisfaction with their living place.

“It is unfortunately the case today that high rents mean that job offers in another location are not viable as the living costs will take up too much of a bite in the household budget”, Piret explains.

“The housing loan volume acquired during the boom years is high, but recipients have become the owners of ‘golden handcuffs’, which do not favour mobility” she goes on.

Real estate expert Tõnu Toompark states his surprise in the article that the volume of owners during the real estate boom did not grow hugely.

According to Tõnu the real estate and economic crisis had an effect on the numbers of owners in the sense that volumes of rental properties and tenants could be improved.

Meanwhile Real Estate brokers’ Arco Vara CEO Lembit Tampere claims in the article that such a high level of home ownership is not realistic in Estonia. “Clearly there has to be a rise in proportion of rental apartments, and the reason for this is to a certain extent our artificially high level of home ownership, going back to 1991 [and the restoration of independence]”, he says.

The full Äripaev article (in Estonian) can be read here.

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Statistics: No Change In Loans Interest Rates

Euro-based home loans rates have remained unchanged in the range of 3.2 to 3.4 per cent, despite small rises in the Euribor index of European lending rates since 2009, according to Tõnu Toompark on his blog. The monthly rate stood at 3.4 per cent for March, whilst the Euribor index over the same period was 1.5 per cent, writes Tõnu.

These small but persistent rises in the Euribor rate, when combined with falling lending rates by the banks themselves, mean that banks’ margins have been eroded somewhat.

Meanwhile the average interest rate for business loans stood at 4.47 per cent in March, Tõnu explains.

The original article (in Estonian) along with diagrams illustrating the chages in Home loan rates in both Estonian Kroons and Euros, and margins, is here.

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ECB Rate Increase To 1.25%: Effects On Estonian Property Market

The European Central Bank (ECB)’s decision to raise the base lending rate to 1.25% on Thursday last (7th April) perhaps comes as no surprise, and it seems likely that further rises are due for the course of 2011.

Since many Estonians hold their mortgages in variable rate packages which follow the base rate, this means an increase in repayments (approximately 160 Euros per year, according to Baltic Business News, quoting business publication Äripäev).

However it needn’t mean that fixed lending rates in Estonian high street banks will go up just yet, since banks are prepared to absorb the increase in their margins. The current margin average is some two per cent (i.e. on top of the base rate) down from 2.4-2.6 per cent in 2009, but the all time typical margin stands at only 0.5 per cent. Therefore there is still plenty of room for a reduction of margins, rather than an increase in bank rates. This is significant in the rejuvenation of the Estonian property market after the recession of 2008-2010, since it means bank rates should remain at an affordable level for the meantime, and not act as a barrier to potential homeloan customers.

The increase in base rate is likely nevertheless to impact upwards on the Euribor index of average European banking interest rates.

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Personal Bank Deposits In Estonia Seven Times Greater Than Loans

Deposits in Estonian banks have been steadily increasing, so writes Tõnu Toompark on his blog, Estonian data for February shows a total value of bank deposits of just under 10.5 billion Euros, of which 5.9 billion is held in on request accounts which can be accessed with little or no notice.

Of this total balance, some 4.2 billion euros is held by private individuals, of which 2.1 billion Euros, i.e. about a half, can be readily accessed.

Annual personal loans turnover (constituting home, customer and other loans) peaked in 2007 at the height of the real estate boom, at a level which was the same as the actual balance of deposits (in other words the banks loaned out in 2007 the same amount as they held in deposits – and the total loan balance was more like twice the level that was held in deposits).

However the position by Feburary 2011 was that, in the aftermath of the downturn and severe austerity measures, banks’ much more stringent criteria for granting loans meant that loan turnover had plummeted to a mere 15 per cent of the balance of deposits.

The full article (in Estonian) including graphs plotting changes in loan balance, turnover and the relationship between the two can be viewed here.

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