Bank of Lithuania
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Investment in commercial RE in Lithuania is at record highs, however, the development of housing and other RE market segments is balanced. Interest rates on housing loans are gradually increasing – likely due to rising demand and reduced competition, while decisions to encourage house purchase in the regions can raise RE prices in areas deemed eligible for housing support. These and other important RE issues are discussed today in the Bank of Lithuania’s annual Real Estate Conference in Kaunas. 

‘Housing price changes go hand in hand with wages, the RE market remains sufficiently liquid and poses no risk to financial stability. To add, the Bank of Lithuania has taken steps to ensure that credit institutions, the main driving force behind this market, would accumulate counter-cyclical capital buffer and, in this way, ensure the resilience of the financial system. Links between possible RE taxation changes and financial stability should be brought into sharper focus as well. Moreover, commercial RE market should also be monitored more closely,’ said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania. 

More houses and apartments than at present were sold only in 2005-2007, however, now one of the main differences is sustainable market developments, which are also supported by the Bank of Lithuania’s Responsible Lending Regulations. Housing affordability has remained unchanged due to housing prices rising at the same pace as wages.

According to Mr Garbaravičius, sustainable housing price developments are also reflected by the preliminary data of the Bank of Lithuania’s index of recurrent housing transaction prices currently being developed by its experts. The developments of this index are similar to the data published by Statistics Lithuania, however, it will allow to gauge the RE market temperature more frequently and quicker. The new index is calculated using data on housing deals from the Centre of Registers; comparisons are made between prices of the same object’s recurrent deals. 

The envisaged government support for house purchase in the regions over the coming year could have a marked influence on the regional RE market. According to the Bank of Lithuania calculations, government support could increase the loan portfolio by €70 million over 2019. This would constitute a significant amount as, in a year, €500 million in housing loans are granted for house purchase in areas eligible for housing support, in other words, next year, the annual flow of housing loans granted for those areas due to subsidies alone could increase by 14%. 

RE market activity continues to be supported to a large extent by bank crediting, however, the average housing loan margins have increased significantly. ‘The reasons for the overall change in the average margin (about 0.25 percentage points in 2018) are not entirely clear; the most likely explanation would be an increase in demand and reduced competition in the housing loan market’, noted the Member of the Board.

The link between RE taxes and financial stability are to be one of the key issues to be discussed at the conference as well. Stamp duty (does not apply in Lithuania), taxation of the main and subsequent real estate owned, tax allowance for housing loan interest (no longer applied in Lithuania), house sale (capital gains) and rent income taxes as well as other tax instruments can significantly affect the RE market, banks, household indebtedness and, in turn, financial stability as well, thus, when assessing possible changes to RE taxes, their links to macroprudential policy should also be taken into account.