Real estate market forecast: pricing peak has been reached

Building site
DELFI / Andrius Ufartas

Developers now openly talk that the rise in real estate prices that has been ongoing for a few years and rising sales have declined. Supply continues to rise, but increasingly fewer homes are being purchased than during the record breaking years of 2015 and 2016. There are also mentions of potential price correction.

This situation is being described not as a bubble bursting or a crash, but simply as the market cooling and returning to normalcy. director Arnoldas Antanavičius also points to a record being broken – developers in Vilnius are offering 5000 new flats. Such a number had not been reached in the market before. According to him we are at the peak of a cycle and there are no longer any arguments for price rises.

Overfilled market

Eika calculates that this year 3700 flats will be sold in Vilnius, down from 4200 last year, with 3500 sold in 2015. Earlier buyers would have a selection of around 3000 flats. Another marker of market cooling is the decline in rent revenues. While housing has been increasing in price until recently, rent prices have remained stable for a time and the investment returns are declining.

“Sales are declining relatively little, however if we look at the ratio of supply and demand, it is akin to the year of the Crimean crisis, when Russia began its intervention to Ukraine and demand suddenly dropped. People were simply afraid, began waiting how things will develop and did not purchase homes,” A. Antanavičius explains.

Developers also talk that the sales growth experienced so far has halted.

“Over the last three years we continued to see rising sales. This cannot continue forever. Just at the start of this year, I said that there will no longer be growth,” the head of Hanner Arvydas Avulis said.

He also notes that there is no crisis now because we are comparing to prior achieved record sales. Sales are akin to last year, perhaps a little lower. A. Avulis identifies another factor which impacts buyers’ behaviour – this market is particularly sensitive to various talks and forecasts.

“A few years ago I wished to thank Bank of Lithuania head Vitas Vasiliauskas, when he announced in summer that from fall, the conditions of loan giving would be made stricter. Sales shot up. Now there is talk about stagnancy and potential buyers are hesitating,” A. Avulis admits and says that after a few months statistics will show the real situation.

Unprofitable rent

When sales rise three years in a row, it has to end eventually. At the same time A. Avulis is not expecting a crash, even though there are very many projects, just in Vilnius around 100.

The director of MC Group Audrius Mockus, who rents a dozen apartments himself, concurs with his colleagues and says that the market cooling can be seen via two metrics. Firstly with supply rising, the average time to sell for new flats rises. Today this has risen to nearly 1.4 years, this being a fairly long period. Another metric is the returns for rent investment. This means that the real estate market is overvalued.

“We have a dozen apartments being rented out and we can see that while rent prices are not rising, apartments are. This means that the market is saturated. Furthermore while the rent may not have declined, however demands have risen. For example just recently you could rent out a flat with fairly old repairs for 350 euro a month. Today the same price warrants a newly repaired flat with furniture from Ikea,” A. Mockus explained the differences.

The businessman is not expecting a crash either. He simply predicts that over the next few years demand and supply will even out.

Warehousing constructions

A. Antanavičius says that the market has cooled, but in 2012 and 2014 demand had declined, but quickly recovered. The current circumstances are cardinally different. Supply exceeds demand, which has so far been large and likely has little room to grow.

“Developers either need to stop constructions or come to terms with the offer and discount period being long. Perhaps it will no longer be enough to gift buyers parking space, but also will be necessary to significantly decrease prices. I believe that this is how it will proceed because suddenly halting projects will not be possible. There are already started projects and already purchased land. A year will be needed or more for the supply and demand to even out,” A. Antanavičius explained.

He also notes there are threats, for example rising interest rates. A. Antanavičius predicts that over the coming years, the prices of new homes will decline at least 5-6 percent because buyers are increasingly enabled in negotiations. So far the developers have dictated conditions, experts from Precondo also agree with this.

“If there won’t be discounts and offers, I cannot imagine how developers will keep up demand. However there will be no crash as before the crisis,” the expert noted.

Rewriting prices

Other market participants also believe that developers and citizens who bought apartments through loans are not faced with catastrophe. However experts Delfi spoke with earlier admitted that the time is nearing when sellers will be forced to return to normal, not heated market conditions. One of the first signs could be the change in prices offered in advertising. So far a number of sellers immediately advertised with raised prices immediately, rather than the real market prices.

“If we are to talk about advertising portals where individuals sell property, the sellers simply look at how much flats cost in nearby objects and add 2-3% in the belief that for example their bath is better set up than their neighbours, hence the flat should be more expensive. If the flat is not bought for a longer time, the price is lowered,” Inreal analyst Robertas Žulpa explained.

Once again though, experts do not view the situation as a looming catastrophe.

On the other hand certain experts have noted potential price correction downward because according to Inreal data, today 5000 flats are on offer in Vilnius. This is a record number while demand is declining.

“For now what is happening is the optimistic outcome. Last year the market was especially active and the decline could have been much greater. However even if the number of transactions had declined by 10%, rather than 1% as has so far, nothing bad would happen,” Ober-Haus Evaluation and Market Research department head Saulius Vagonis says.

He notes that a far greater problem is that a number of private individuals and even developers are setting prices in new objects too carelessly. The analyst presents an example – they begin constructions and immediately ask for a greater price than in a nearby house.

“Everyone wants larger prices already in advance. This is particularly visible in adverst where prices are rising faster than realistically the real estate prices rise and the gap between the asking price and the one paid by buyers is fairly large,” S. Vagonis outlines.

He says that people are being optimistic because they hope that specifically their object will rise in price faster than other property and that wages will rise.

About Arunas Milasius 3 Articles
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