Property Prices in Latvia Cannot Keep Going Up

Latvia is just one of a handful of former Soviet controlled countries riding high on a wave of economic advancement, increasing wages, spiralling property prices and runaway inflation - and until recently everyone seemed certain that the Latvian phenomenon of double digit GDP growth, quadrupling property prices and rapid wage expansion could continue unabated and have no negative effects on the economy at all!  That was until Standard and Poor’s pointed out that “there are clear signs of overheating” as well as an “escalated risk of a hard landing” in Latvia.

It seems that general investor sentiment is slow to react to this news but property prices in Latvia cannot keep going up you guys, and you need to heed some of the following warning signs and protect yourselves and your level of exposure accordingly.

As stated, the credit rating agency Standard and Poor’s has commented negatively on Latvia’s economic position and downgraded its rating to ‘negative’ from ‘stable’.  In addition to their recent analysis of the economic situation in Latvia, leading economists from Danske Bank have issued a hard hitting statement that suggests that Latvia could lead the central and eastern European region into an economic crisis reminiscent of the 1997 Asian Crisis.

If all this sounds a little too far fetched, please note that the warning signs in Latvia are actually more pronounced than they were prior to the Asian Crisis and yet fewer people seem to be heeding the warnings.  Fortunately the Latvian Government have listened and Olegs Baranovs who’s the director of the Department of Economic Policy agrees that yes, the economy is overheating dangerously.

So, what’s anyone actually doing about the situation? 

Well, a governmental task force has been dispatched to come up with an inflation busting action plan.  The initial findings of their research and brain storming sessions are due any day, ‘but’ says Helmuts Ancans who’s that head of the macro economics department of the Central Bank of Latvia, ‘the plan will be just a working paper for further discussion’ it is not expected to present a solid fiscal reform approach to fix the situation that is witnessing property prices ever increasing and stretching the affordability gap to breaking point. 

Ancans’s fears are reiterated by independent economist Peteris Strautins who recently wrote of Latvia - “Latvia must change from growth driven by domestic consumption to growth driven by foreign demand. Sadly, it is no longer possible to do this without a shock: the time when it could have been done is past.”

Kristine Vitola, a senior economic analyst from the Central Bank of Latvia was asked to comment specifically on property in Latvia and the short term forecast for the investment marketplace, she warned that current property price growth rates are simply not sustainable and the first sector likely to be hit is Soviet-era apartment buildings with a slowdown likely to spread throughout the entire property market. 

Speculators riding the wave of property price expansion need to take note that despite strong wage growth in Latvia, the real price of property has steadily stretched beyond that which the average household can afford, and even if there is no hard landing in Latvia there will be a dip in the property marketplace in the near term.

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