Rental housing adds further momentum and risks to the RE market
Secondary apartments purchased as an investment or rental property account for almost a fifth of all apartments in Lithuania and this share, particularly in major cities, continues to increase. Such developments provide an additional impulse to the real estate (RE) market, the activity of which has already reached historical highs. RE market trends as well as expert insights were discussed at the annual Real Estate Conference held by the Bank of Lithuania on 20 November.
“Housing is considered to be a common and safe type of investment. Although the RE market shows no evident signs of overheating, it is essential not to ignore potential risks, especially in cases where housing purchased for investment purposes is acquired with borrowed funds. Recent data has shown that even during the economic upswing households with two or more housing loans are more likely to face loan repayment difficulties than those that have only one loan and, probably, live in mortgaged housing themselves,” said Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
The share of secondary dwellings (purchased as an investment or rental property) in Lithuania is steadily growing. According to the data of the State Enterprise Centre of Registers and Bank of Lithuania calculations, the share of secondary housing in Lithuania in November 2019 comprised nearly 20% out of 1.4 million residential properties registered in the country. Over 2018 and part of 2019, this share grew by almost 1 percentage point. The share of secondary RE in major cities is relatively similar: in Vilnius, Kaunas and Klaipėda it accounts for 17‒19% of the total number of registered dwellings.
The rapid development of the secondary housing market is also stimulated by the dynamic rental (particularly short-term) market. For instance, over the last four years, the total number of RE properties in Vilnius, Kaunas and Klaipėda – Lithuania’s three major cities – that are actively rented through one of the world’s most popular short-term rental platforms has doubled to reach 4,000.
The overall activity of the RE market in Lithuania has been rising for the fourth consecutive year: the number of RE transactions stands at historically high levels, the new housing supply is strong, while housing lending remains active.
According to Mr Garbaravičius, average income growth is outpacing house prices, which indicates that housing in the country remains affordable. Stability in the RE and credit markets is ensured by the Responsible Lending Regulations issued by the Bank of Lithuania in order to prevent irresponsible behaviour of housing buyers and lenders as well as to avoid unreasonable expectations.
Housing lending in Lithuania remains active, although the average interest rates on housing loans have increased by nearly 2.3% over the last four years and now stand well above the euro area average of 1.8% (while a few years ago interest rates in Lithuania were below the euro area average).
Having assessed trends of the housing loan market, the Bank of Lithuania has initiated a public discussion with consumers, market participants as well as other concerned parties and provided preliminary suggestions and ideas that could potentially boost competition in the housing loan market. The Bank of Lithuania has provided 8 preliminary suggestions for the public discussion. The proposals are divided into three separate groups: 1) attracting newcomers to the lending market; 2) facilitation of search for the best housing loan proposal and its digitalisation; and 3) easier and more active refinancing of housing loans.
Implementation of these proposals would benefit consumers and lead to more favourable lending conditions and lower costs.