Swedbank: Baltic HAI – High confidence replaced by high uncertainty

  • SwedbankThe housing affordability index (HAI) shows high affordability in the Baltic capitals; however, the data do not depict the current situation in the market due to the time lag between real-time events and statistics.
  • The war in Ukraine poses challenges to the supply side and confidence levels. Demand is expected to soften, while supply bottlenecks will continue to support prices.

The underlying conditions for housing affordability were different in each of the Baltics in the final quarter of 2021. The affordability index decreased in Estonia, as the average price level exceeded wage growth. In Latvia, wage growth more than doubled the average price growth, leading to a surge in the affordability index. In Lithuania, affordability increased in annual terms even though prices grew faster than wages – thanks to lower interest rates, the decrease of which supported affordability in all the Baltics.

The war in Ukraine and sanctions imposed on Russia and Belarus could lead to tamed market activity in the beginning of 2022. Supply-chain disruptions are likely to be exacerbated. The shortage of materials imported from Russia, Belarus, or Ukraine could pose problems for developers and slow the construction of apartments, limiting the supply available for reservations in the near future. Consumer confidence to build or purchase a home was high the last quarter of 2021 in the Baltics. However, a drop is expected in the beginning of 2022 amidst high uncertainty. The already-high construction costs are expected to increase even more, putting upward pressure on the average price level in all Baltic capitals.

Uncertainty is high, and with the currently available information it is difficult to predict the extent and the near- and long-term effects of the war and sanctions on the real estate market and housing affordability. The upcoming months should bring more clarity.

Housing Affordability Index: Q4 2021

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