The “Swedbank” housing affordability index shows that in the second quarter of this year, a family with average income (one and a half times the average salary or about 2700 euros) could buy a 58.6 square meter apartment in Vilnius – 5 sq.m. smaller than at the end of last year and 20 sq.m. smaller than five years ago. Similar trends of decreasing affordability are seen in other major Lithuanian cities.
This year, the ECB, fighting inflation and its expectations, has already raised and will raise the base interest rates at least once more. As a result, the 6-month Euribor has increased by more than half a percentage point this year, to almost 2.7 percent. However, this time, unlike in 2022, there are not many reasons for inflation to accelerate further, so we are already near the peak of interest rates.
Higher interest rates have slightly reduced the possibilities to buy housing, but even more this year, housing prices rising twice as fast as wages have hurt. The repeated price index of the Bank of Lithuania shows that in many cities apartment prices are about 15% higher than a year ago, and in Kaunas they have increased by a quarter.
The price increase detached from wage growth is not only this year’s problem. Still, there is no reason to complain about slowly rising wages – in the last five years, the average salary has increased by a tenth per year, and net wages are currently twice as high as they were at the beginning of 2019. Unfortunately, during this period apartment prices rose even faster.
Why are apartment prices rising faster than residents’ wages?
Expensive and unaffordable housing is a sad reality of many wealthy and growing cities. This situation is created by several circumstances. First, usually the largest and wealthiest cities offer broader job, education, self-realization, and cultural opportunities and therefore attract more residents from other cities and countries. In Vilnius, the population increased by more than 100,000, or almost a fifth, over five years.
Second, more advanced countries and cities set higher energy, environmental, and infrastructure requirements. When developing new projects, not only supply and price are considered, but also the aim is to avoid congestion, ensure more and sufficient leisure, sports, and green spaces around residential buildings. Real estate developers usually urge faster issuance of building permits and the removal of excessive requirements for new constructions. However, few residents would probably be happy if another high-rise were squeezed between their and their neighbor’s house. Here I am somewhat exaggerating, but the truth lies somewhere in the middle – in advanced countries, not only housing affordability but also the quality of infrastructure and life around it is important.
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Third, wealthy and rapidly growing cities attract not only new residents but also investors in real estate. According to the Bank of Lithuania’s assessment, more than a third of apartments in Kaunas and Vilnius are purchased as investment objects this year. Such additional demand fuels price growth and reduces the opportunities for first-time homebuyers.
Of course, investment capital is not bad – it also helps finance new constructions. However, in many countries, regulatory authorities seek to prevent short-term speculation, where the buyer does not plan to furnish or rent out the property but only wants to sell it after a year at a much higher price. Such speculation is usually not stopped even by higher real estate taxes on non-primary residences (because ownership is short-term), so higher transaction taxes are more often applied. For example, in Spain, the transaction tax ranges from 6 to 13% of its value, and Singapore applies up to a 60% tax for foreigners.
What does rental yield show and what trends to expect in the future?
Still, price growth can be too rapid and turn the housing market into a victim of its own success. In the second quarter of this year, the number of transactions in all major cities decreased, and new apartment reservations in Vilnius were a fifth lower than at the beginning of the year. The number of unsold apartments in the capital reached new records (over 6000) and shows that developers can build more projects than residents can and want to buy.
The somewhat detached housing prices from value are also indicated by the continuing decline in rental yield. This indicator shows what portion of the housing price is made up by its annual rental income. In Vilnius, the rental yield is only 4.5% and is more than a percentage point lower than the long-term historical average. Its decline shows that in recent years the selling price of housing increased faster than its rental price. However, many investment property buyers probably think more about how much and how quickly the purchased housing can still appreciate than about rental yield.
All these circumstances – decreasing affordability, low rental yield, sufficient supply – indicate that the bargaining power should currently be in the hands of buyers, not sellers. In the future, double-digit price growth is neither sustainable, desirable, nor likely. Housing remains Lithuanians’ favorite asset class, but it will not necessarily remain as hot in the future as it was in the past decade.
