That said, economists note than one should differentiate between crane-dotted vistas of Vilnius and the often stagnating rest of the country.
Experts say that it is the right time to invest into Lithuania’s booming capital city. As to the risks of a price bubble, they explain that the situation today is very different from the one that led to the 2008 bust.
Markets stimulated by ECB policy
One of the main factors of growing real estate prices is the low interest rates on loans, says Vilnius University economist Rimantas Rudzikis. He says it is quite common to see real estate prices grow as interest rates drop and vice versa.
Another important stimulating factor is the European Central Bank‘s quantitative easing policy launched in spring last year. “It is clear to see in Lithuania, the number of bank credits issued to home owners and businesses has risen, their crediting has vastly improved,” explains the economist.
“First, the ECB is encouraging lending. Second, people are more willing to borrow and, third, people’s expectations for the future are improving. Everyone can see unemployment is decreasing. Real estate is closely linked to how confident an individual is with his personal circumstances, because these are long-term investments, it’s not buying a pint of beer. You take out a loan for 20-30 years,” Rudzkis listed the reasons for the real estate boom in Lithuania.
Among young people, who are the main market of first-time home buyers, fears of losing employment and failing to re-enter the job market has dissipated, he says.
“Furthermore, everyone is expecting pay rises, not pay cuts. The rises in wages have gradually begun and in some categories, such as among IT specialists, wages have risen significantly,” Rudzkis says.
When asked if this optimism is built on sound foundations, the economist says that the expectations will be justified unless a global crisis strikes again.
“The global financial system is in a tense situation, it could enter a phase of turbulence, which could change everything. Objectively, Lithuania is fated for growth for a few coming years. All Lithuanian problems are long-term ones and closely connected to our vast reliance on the global markets,” Rudzkis concludes.
Real estate as investment
The real estate market is becoming a refuge for those with disposable income, but unsure where to invest.
“You buy a flat and rent it out. It will neither burn down, nor disappear or go bankrupt like a bank, but it will bring some money in. Furthermore, the economically developed world is threatening with a possibility of negative interest rates,” the economist points out another motive for investing in real estate.
Rudzkis notes that the entire real estate market is negatively impacted by the contracting population in the country, albeit the factor does not affect Vilnius.
“As such, there are no negative factors in play in Vilnius, while there’s a number of benefits. I tend to disagree with the idea that homes are becoming less affordable. In Vilnius, especially for young people with good skills, wages are significantly higher than the Lithuanian average. Meanwhile old flats are inexpensive,” the economist believes.
Lessons from the crisis?
The growing tendency of ordinary people to invest their disposable income into real estate is also observed by the economist Stasys Jakeliūnas.
That said, when discussing Lithuania’s real estate market, he recommends drawing a distinction between Vilnius and the rest of the country where there are relatively few transactions or new developments.
Jakeliūnas notes that the current situation in the home loans market is very different to that in the pre-crisis year of 2005.
“The difference from 2005, when a rapid rise in prices and a construction boom commenced, is that back then this was associated with the expansion of bank lending. This expansion was fuelled by money coming from the banks’ owners in Scandinavia,” he noted.
“Such a situation is not repeating itself now. On the one hand, loans are on the rise, but not quite as fast. Meanwhile investment is also growing and the loans can be covered by local investment.
“To put it differently, there is no longer heavy dependency on external financing from mother banks,” the economist lists differences between 2005 and now.
In large part, the 2008-2009 crisis was brought about by the Scandinavian mother banks changing their lending policies and not renewing loans for their branches in the Baltics.
Jakeliūnas points out that there is no basis to expect any dramatic fluctuations or depressions in the Lithuanian loan market.
That said, it is difficult to predict the situation several years hence. “It is unclear what the Italian banking crisis will turn into, something local or more explosive. The banking sector has not purged itself of bad loans. Therefore theoretically, even if the possibility is small, such an infection could travel far and even reach Scandinavian banks. If you look at Sweden, they are talking about a possible price bubble,” according to Jakeliūnas.
Nevertheless, the economist assures that the 2008-2009 crisis has taught both politicians and financial regulation institutions how to better deal with such shocks in the future.
“Back then, financial regulators and politicians were forced to respond quickly and with little guidance. Now there is more or less a clear idea of what problems may come this way and there are more opportunities to prepare for crisis management,” Jakeliūnas says.