Will Property Prices in Estonia Continue to Rise?

According to the Royal Institution of Chartered Surveyors’ European house price inflation league, Estonia has enjoyed the most significant gains in underlying property price for the last two years in a row.  Much has been made of this fact in the media and many interested buyers have been hunting around for information about the types of property they should be buying and the most ideal locations for purchase - but it’s actually quite disconcerting that so much attention has been given to the fact that Estonia has been at the top of the league with focus seemingly solely centred on the huge rate of growth witnessed in property prices. 

Why has so little attention been given to the reasons behind the rapid and dramatic rate of property price inflation in Estonia?  Surely understanding the factors driving the market is actually key to answering the question on everyone’s lips – namely ‘will property prices in Estonia continue to rise?’

If people looked at why prices have been dramatically increasing they would be able to see that Estonia probably witnessed the peak in terms of property market buying and selling activity in the fourth quarter of 2005 and that there will not be a similar rise in house prices in 2007 as there was in 2005 or 2006 – that’s not to say that Estonia no longer represents a positive property investment choice, it’s just that the goalposts have moved for investors and they have to understand the state of the market today if they want to succeed in realising profit from it.

The positive and rapid economic development enjoyed by Estonia in recent years that saw the nation head the streak of Baltic Tigers resulted in unemployment falling dramatically and GDP increasing impressively – this meant that almost overnight Estonian people became more affluent and more able to afford to spend.  At exactly the same time local banks began offering low interest rate mortgages which were relatively easy to secure, and suddenly a nation of people who had previously been housed in faceless, soulless crowded communist accommodation were able to afford to buy their own home.

Demand for property for sale in Tallinn and the main employment centres in Estonia increased far faster than the rate at which developers could supply fresh property stock; affordability within the consumer marketplace was increased significantly thanks to the development of a healthy mortgage market, and an incredibly favourable labour market situation resulted in rapid wage growth allowing more consumers the ability to afford greater loan exposure – as a result property price growth in Estonia began spiralling upwards.

But today the entire situation has changed. 

According to the Bank of Estonia the nation’s economic growth rate has reached its peak and will now slow down to a more sustainable 7 – 8%. 

There is a real risk in the banking sector that too much loan activity has been focused on the real estate market through mortgages and loans to developers and this may mean it becomes harder to secure property finance in the future. 

Household debt levels have reached an all time high in Estonia in relation to both GDP and disposable income - and if interest rates increase this could seriously undermine the financial situation of those households which have over exposed themselves with loans and mortgages.  In addition to this Estonian people have no experience of dealing with long term loans, and any external factors that affect their ability to afford their debts could have a seriously negative effect on the property market.  In the meantime public knowledge relating to the fact that personal debt levels are increasing has already reduced the appeal of the property market among local consumers. 

Higher prices for property in Estonia coupled with the completion and delivery to the market of substantial property stock has halted the dramatic discrepancy in the supply/demand ratio and also resulted in a cooling of domestic activity in Estonia’s real estate market brought about by affordability constraints. 

Additionally construction activity could be negatively impacted in 2007 by higher land, labour and material costs as well as a lack of qualified labour in certain sectors of the construction industry in Estonia – these negative factors could be passed on to the consumer through higher prices being asked for property for sale which will again hit the affordability constraints already in place and reduce construction activity as well.

What all this means is that the entire investment property landscape in Estonia has changed and a great deal of short term property market potential for speculators seeking instant returns has gone from the real estate marketplace in Estonia – but because the nation continues to be an affluent and economically successful country attracting foreign direct investment in abundance and which has a balanced state budget and a flourishing modern market economy, there is continued and sustainable local and expatriate demand for housing – both to buy and to rent - and it is this demand that underpins the fact that there are property investment opportunities still to be had in Estonia.

Special Reports: Property News for Estonia

Estonia a Guide for Property Investors
Property prices in Estonia are growing steadily; international real estate investors are attracted to long term market growth potential.

Estonia Investment Property Buying Process
The process to buy investment property in Estonia is incredibly simple, straight forward and inexpensive - adding to the country's appeal

Estonia Property Investment Guide
Immediate property investment opportunity in Estonia is limited to Tallinn but long term prospects exist elsewhere.