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As house price growth accelerated during the pandemic, housing affordability in Lithuania started to deteriorate for the first time in a decade. This trend did not last long and, as price growth slowed down and incomes continued to rise rapidly, signs of improving affordability have already become visible from 2023. Although the deterioration in housing affordability in Lithuania was a temporary phenomenon caused by strong external shocks, it is important that housing policy in Lithuania provides the conditions for a structurally sustainable level of affordability. In this study, the Bank of Lithuania has analysed various indicators of housing affordability and the demand and supply factors that may it. The results of the study have led to four main orientations for sustainable housing policy: to achieve sustainable housing demand developments, a larger and more flexible supply of quality housing, meeting the housing needs of socially vulnerable people, and creating a long-term and common housing policy strategy.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Available only in Lithuanian

During the Covid-19 pandemic, house prices and mortgage credit are growing at a long-unseen pace. However, it is unclear, whether such growth is warranted by the underlying market and macroeconomic fundamentals. This paper offers a new structural two-market disequilibrium model that can be estimated using full-information methods, and applied to analyse housing and credit dynamics. Dealing with econometric specification uncertainty, we estimate a large ensemble of the two-market disequilibrium model specifications for Lithuanian monthly data. Using the model estimates, we identify the historical drivers of Lithuania’s housing and credit demand and supply, as well as price and market quantity variables. The paper provides a novel approach in the financial stability literature to jointly measure house price overvaluation and mortgage credit flow gaps. We find that by mid-2021 Lithuania was experiencing a heating in housing and mortgage credit markets, with home prices overvalued by around 16% and the volume of mortgage credit flow being 20% above its fundamentals.

JEL Codes: C34, D50, E44, E51, G21.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.