Metaphors from Citus experts: two waves of challenges for the housing market

Building site
Building site. Photo K. Cemnolonskis DELFI

Over the last two years, the housing market in Lithuania has been marked by two “black swan” flights – events that analysts could not predict and data did not suggest. The first tide marked the beginning of the COVID-19 pandemic and the first lockdowns. Then the market went into a technical pause, with negative sales due to uncertainty for at least a month: no new bookings in Vilnius and Kaunas, only contract cancellations, according to a press release from Citus.

Then, despite the general negative sentiment and most forecasts, a surge followed. In Vilnius, there was a tsunami of demand, tornadoes of prices, and a drought of supply, caused by the rising cost of materials, the supply shortage, labour shortages, and a bureaucracy that had become overwhelming.

These breakwaters effectively suppressed the record-breaking waves of demand in the housing market last spring and proved that they are made of solid reinforced concrete (or any other material, as reinforced concrete has become very expensive). So there was a standstill, with only the winds of costs blowing, as supply was stuck in the market’s harbour gates. But the whole big economic port was safe and stable, and the waves of property washed ashore from the financial ocean a lot of tax amber, turnover wealth, and other goodies for the port’s prosperity.

However, another unexpected tide came at a similar time at the end of last February, when Russia launched an unjustified and unprovoked war in Ukraine. Worries about it swept across the globe and briefly shackled the housing market. However, it seems to have frightened the port population less than the invisible enemy in the form of the coronavirus two years before: the virus threatened each of us directly, and its consequences, which squeezed social life and businesses, also threatened incomes.

Let us turn from metaphors to statistics. In March, 158 new homes (apartments and terraced houses) were reserved in Vilnius. The usual comparison would be with last year’s corresponding period, which has gone down in history as the second-highest ever, with 958 reservations. However, the first half of 2021 was amid demand’s aforementioned “tsunami”. Halfway through March 2020, sales were at a standstill for most of April after the first lockdown was announced. In March 2020, 291 homes were reserved and in April, only 90. Therefore, it is with April 2020 that it would be most logical to compare March 2022.

Lessons from history, challenges, and opportunities in Vilnius

After the first lockdowns in Vilnius, there were many opinions that a fall in house prices should be expected. However, this did not happen – on the contrary, prices continued to rise rapidly, with an annual increase of more than a fifth.

Why did this happen? First of all, because of the ever-increasing amount of financial wealth that people have accumulated in various forms. Rising economic growth and wages, and the reduction in spending during the pandemic, have allowed people to save even more, but this trend has been a long time coming. People have a lot of money (Bank of Lithuania statistics confirm this – https://www.lb.lt/en/financial-assets-and-liabilities-of-households-3), which, thanks to inflation and essentially zero base interest, is eroding savings, and, on top of that, favourable (but responsible – households’ liabilities are low compared to their financial assets – same link) borrowing opportunities create sufficient incentives to invest in real estate. This has created a strong wave of demand.

On the other hand, some developers put their planned projects on hold at the beginning of the pandemic, followed by the high cost of building materials and, supply disruptions, labour shortages. Then, as new requirements and other bureaucracy surrounded new projects, supply began to slide significantly. As a result, the overall housing stock in Vilnius has sunk to lows not seen for at least five years, with some more attractive homes being snapped up in previously stagnant projects and new projects still not seeing the daylight. This has put strong pressure on prices.

Meanwhile, developers, especially now, have a negligibly small backlog of completed units, so there was no need to rush to sell them off in the past, and there is no need to do so now.

Even today, housing supply and prices in the capital are still moving in different directions. There are only 3 333 vacant homes (flats and terraced houses) for buyers to choose from in the capital today. This is a nice number but far too low for the prevailing demand. And there are no objective reasons for it to improve for the time being: the cost of materials continues to rise, their availability has shrunken further due to the sanctions against Russia and Belarus (some companies used to buy some of their materials from there; now they can no longer be certified in the EU), and the issue of labour has not become any easier, and the prospects are dim – after the war, a large number of Ukrainian workers are likely to return to rebuild their devastated homeland.

Despite all this, life in Lithuania and the housing market are not stagnating, as it is important for the whole economy. We have seen a drop of around 40% in the number of enquiries and appointments, but customers are now more focused, more determined, so sales efficiency remains unchanged. Due to rising costs, we have now slowed down the pace of our own sales to take a responsible view of the situation and continue to deliver on our commitments to customers. We, therefore, view the monthly sales result of 16 contracts in March as good.

Banks also do not see a drop in interest and do not foresee any changes in their policies or global decisions soon. As a result, base rates are unlikely to move out of the “zero zone” in the coming years. Despite inflation, the impact of sanctions on the global economy will continue to require quantitative easing.

Solidarity between societies and businesses will also reduce the potential negative effects of sanctions. As a result, only a slowdown in growth is currently forecast, which is a very important positive signal for the global and Lithuanian economies.

All this implies a return to demand growth. This should happen in the next 2-to 4 months. A lack of supply will still dampen demand, but continued price increases will encourage buyers to lock in their projects as early as possible. Meanwhile, developers are likely to be encouraged to delay sales to manage cost price increases and assess pricing better. This will further constrain supply. In March, the average prices of apartments on offer rose from EUR 2 886 to EUR 2 960/sqm.

If the barriers to entry for new projects are resolved, and the yield of planned projects in Vilnius starts to increase, this would be a win-win situation for buyers (who would benefit from the higher supply and the competition limiting price growth), businesses, and the national economy as a whole.

The shadow of a historical event in Kaunas – statistically more bookings than in Vilnius

Kaunas, however, seems to be more comparable to a river port: the tides are much weaker here. Last March, the temporary capital counted 44 bookings, with nine new projects pushing the housing supply to 1 195 units.

An interesting fact. According to the preliminary data of Citus analysts, Kaunas recorded as many as 180 new housing reservations last month. Statistically speaking, this is more than in Vilnius, and history has never seen such an event before. However, when looking deeper, the specialists noticed that some of the new projects started after they had already “sold out”, which means that sales took place earlier and should be spread over a longer period of time, and the same 44 should be included in the statistics.

The average prices of apartments on offer in Lithuania’s second-largest city have slightly decreased from EUR 2 159 to EUR 2 072/sqm. However, in Kaunas, the entire housing market has been depressed recently, so the change in this direction is likely to be a short-term one and is more statistical than real.

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