Unaffordable Housing: Is Lithuania following the path of New Zealand?

 

To what extent do Scandinavian banks contribute to the housing price bubble?

 

Scandinavian banks (such as Swedbank and SEB) play a significant role in the formation of housing price bubbles both in Sweden itself and in the Baltic countries. Due to their liberal lending policy, low interest rates and the high dominance of Scandinavian banks in the market, these banks directly increase housing affordability and at the same time promote the growth of real estate (RE) prices.

How do Scandinavian banks contribute to the growth of housing prices:

• Large market share (in the Baltic countries): Scandinavian banks control the majority (in some countries over 80%) of the Lithuanian, Latvian and Estonian mortgage market. Their decisions directly dictate the conditions for purchasing housing.

• Promoting the credit boom: Historically, the growth of housing prices was particularly accelerated by active bank lending, when easily accessible credits increased the purchasing power of buyers, which led to a rapid rise in RE prices.

• Weaknesses in domestic risk models: Although banks are regulated, the European Central Bank (ECB) has found irregularities and inaccuracies in the risk models of Scandinavian banks in the Baltic countries, indicating that lending risk assessments are sometimes overly optimistic.

Risks to households and the economy:

• High Scandinavian household debt: In Scandinavia itself (especially Sweden), household debt has reached an extremely high level. This makes the local market very sensitive to interest rate fluctuations and economic slowdowns.

• Consequences of price fluctuations: When a price bubble bursts (as happened in 2008–2010), it has a major impact on the entire economy, although in recent years, due to stricter supervision measures, banks have tried to control lending standards more closely.

 

Banks to the state are like the tail to a dog. They are necessary, and when cut off, it hurts. If the state is small, weak and corrupt, like Lithuania, then the tail wags the dog. We will feed the Swedish economy with our money for inflated housing and student loans until all the young people emigrate instead of suffering, and in place of Vilnius, Kaunas and Klaipėda there will be beautiful Swedish summer houses built with the money we paid.

 

“Rising housing prices are often seen as a sign of economic success. As prices rise, property values ​​increase, construction volumes increase, and the real estate market appears buoyant. However, economists warn that prolonged rapid housing price increases eventually become a sign of stagnation rather than growth. The problem arises when housing becomes one of the main drivers of economic growth instead of productive investment. One of the most striking examples of this is New Zealand.

 

A few years ago, stories repeatedly appeared in the world media about millions of dollars being paid for abandoned houses in New Zealand. Wooden multi-bedroom houses with no windows, peeling paint or basically uninhabitable interiors were purchased for amounts equivalent to 20-30 annual salaries. Although these were exceptional cases, they vividly illustrated the housing affordability crisis and real estate bubble that had arisen in this country.

 

Investment in housing in New Zealand was driven by several mutually reinforcing factors – historically low interest rates, easy credit, limited supply of new housing and a growing belief that real estate (RE) is one of the best investments. At the same time, the pace of new housing development has remained insufficient, despite government efforts to stimulate it.

 

Over the past four years, average real estate prices in New Zealand have fallen by about 30%. For residents who have borrowed for housing in the past 5 years, their mortgages have become larger than the value of their assets.

 

But this is not the only problem. The rapid growth in financing has led to the housing market becoming an important part of the economy. The housing market downturn ultimately led to the stagnation of the entire economy. This has contributed to the record emigration rates over the past two decades.

 

Since 2022, at least 300,000 people have emigrated from the country with a population of just over 5 million, including the country's former prime minister. The majority of those who emigrated are between the ages of 18 and 30. The main reasons are the high cost of living, including difficult-to-afford housing, and better financial opportunities abroad, including in neighboring Australia.

 

Lithuania – pronounced regional differences

 

Could a similar scenario develop in Lithuania? In recent years, housing prices have grown significantly, especially in large cities and in the apartment segment. Housing affordability indices calculated by economists have been declining since last autumn. Although borrowing conditions remain favorable, EURIBOR interest rates, which have started to rise since the beginning of the year, continue to reduce the ability to borrow the necessary amount to purchase the desired housing.

 

The generalized statistics hide significant differences between regions. The overall national average does not show such a sharp deterioration in affordability as in some foreign examples, but it hides very large territorial and social differences that are becoming increasingly pronounced. For example, in large cities 50 sq. m of housing requires 10–18 years of average income, while in smaller cities it takes only 3–5 years. The differences are even greater when comparing the prices of apartments and individual houses.

 

When assessing the price per square meter, apartments are on average much more expensive than individual houses. The price of the latter per square meter in many municipalities does not reach 300 EUR, and the difference in the price of apartments per sq. m between the cheapest and most expensive municipalities exceeds 2,000 EUR.

 

According to price indicators, the greatest financial stress is observed in Vilnius, metropolitan areas and some resort municipalities. High real estate prices in the capital are increasingly encouraging residents to move to nearby municipalities. It is likely that the housing development dynamics of some of the municipalities surrounding Vilnius, including Trakai district, are influenced by the pressure of the capital's market.

 

On the other hand, relatively low prices in the rest of the country do not in themselves mean affordable housing that meets needs. Outside of major cities and regional centers, relatively old housing predominates. More and more funds are allocated every year for their maintenance and upkeep. In 2021-2024, the share of income allocated to housing maintenance increased from 8 to almost 12%, or by a third.

 

Therefore, the problem of housing affordability has not reached the scale typical of New Zealand. However, we are faced not only with high prices and decreasing affordability in large cities, but also with limited choice in the regions and increasing maintenance costs.

 

The consequences of unaffordable housing

 

Low housing affordability has various negative consequences for the economy, and a prolonged problem can affect the long-term prospects of the country. First of all, according to economists such as Edward Leamer and Enrico Moretti, expensive housing can reduce economic productivity by limiting worker mobility. When needed specialists cannot choose jobs where they are most needed, both they, and organizations, and the country's economy suffer.

 

In the case of Lithuania, migration of specialists may be limited not only by high housing prices, but also by insufficient supply of quality housing in the regions.

 

Secondly, the excessive gap between several large cities and regional ones further stimulates the market in the former and reduces the interest of developers elsewhere. Double-digit growth in real estate prices in large cities becomes a sufficiently attractive way to invest, which injects even more money into the market and further increases housing prices.

 

Although real estate has been the dominant investment choice among Lithuanians for many years, and rental housing has established itself as one of the attractive sources of passive income. However, while some acquire a second or third home in the hope of earning from its increase in value or rental income, the dream of others to move into their first home is still moving further into the future.

 

In addition, at the end of the 19th century, the American economist Henry George noticed that excessive directing of financial resources to land or housing increases inequality and does not create long-term economic value. For the economy to grow, money must be directed towards improving the skills of the population, developing new ideas or expanding businesses.

 

Finally, the negative impact of expensive, inaccessible housing is felt most by younger people. When a first home becomes an elusive dream, they may have to postpone plans to start a family, stay longer in housing that does not suit their needs, move from more expensive areas to cheaper ones or choose to emigrate from the country. The aforementioned example of New Zealand confirms this.

 

Economists agree that extremely rapid growth in house prices does not create the same economic value, it has various negative consequences and can signal accumulating economic and social problems.

 

Affordable housing as an element of competitiveness

 

There is no single solution that will immediately make housing affordable. However, cities and countries facing a housing affordability crisis agree on several directions: it is necessary to increase the supply of quality housing where it is most lacking, accelerate planning and construction processes, promote the renovation of older housing, and ensure that state support not only increases demand but also expands supply.

 

Not all of the above solutions are within the power of the Ministry of the Environment. However, the Ministry can make a significant contribution by implementing changes in the areas under its control and by encouraging others to act by its example.

 

This summer, the Assessment of Opportunities for Increasing Housing Affordability should be completed, the Housing Affordability Index of Lithuanian Municipalities and the Housing Affordability Data Scoreboard should be publicly published. This will help to see a more detailed situation and the specifics of individual regions.

 

A Strategic Housing Policy Document should be prepared by the end of this year, which will identify specific housing policy directions, the results sought, and the expected distribution of responsibilities between institutions.

 

A new call for major and partial renovation of apartment buildings and single-family homes will be launched this fall, which should accelerate the renovation process in the country and contribute to further improving the quality of the housing stock.

 

Finally, new housing categories are currently being considered – the creation of an affordable municipal housing model and a scheme for the implementation of pilot projects. It is expected that this decision will acquire clearer contours by the beginning of next year.

 

New Zealand's experience shows that unreasonable growth in housing prices is not an indicator of the success of the state. On the contrary, they may signal that more and more capital is being directed not to the creation of new ideas, business growth or strengthening of people's capabilities, but to the resale of already existing assets. In the long run, this weakens the competitiveness of the economy. Therefore, housing policy today should be viewed not only as a policy of social welfare, but also as a policy of long-term economic growth.

 

The author of the insight is Kastytis Žuromskas, interim Minister of the Environment”

 

Comments: 

 

Takc:

“10-15% of all Vilnius would be - standing unused (not consuming electricity and water - that statistic has been mentioned many times). We need to shake up the investment real estate market, it will start to blossom - there will be sales, the rental market will be filled. There will no longer be that senseless saying that there is a LACK - we need to build more and more. Let's not forget that part of the real estate is "temporarily" occupied by "temporary" immigration - BY/UA, it will come free and quite suddenly, there will be a small shock. In some form, investment real estate should be taxed correctly, until affordability improves. Continuing to feed the developers and their lobby is shooting yourself in the foot.

 

"The 2021 population and housing census was the first in the history of Lithuania to be conducted not by physically visiting people, but based on data from state registers [4.1.3]." https://osp.stat.gov.lt/gyventoju-ir-bustu-surasymai1#:~:text=Lietuvos%20Respublikos%202021%20met%C5%B3%20gyventoj%C5%B3%20ir%20b%C5%ABst%C5%B3,visuotino%20sura%C5%A1ymo%20metodika%20(PDF)%20(2020%2C%20Nr.%20D%C4%AE%2D194) https://osp.stat.gov.lt/infografikas-2021-gyventoju-surasymas-bustai-ir-ju-charakteristikos "After the census, real estate market analysts and urban planners were shocked by the numbers: Almost 20 percent of empty (according to electricity consumption and declarations, unused) housing was found throughout Lithuania. In Vilnius, this number reached about 12–15 percent (depending on from a specific neighborhood).”