Whether it is possible to notice a real estate bubble from inside it was discussed in the annual Bank of Lithuania real estate conference by the chief economist of Swedbank.
A normal situation
“If we are in a bubble, we would not see it. All market participants will find arguments why prices and demand should increase,” said N. Mačiulis.
The economist explained that it is normal that with average housing prices in Vilnius and Talllinn rising toward the levels seen in 2008, people are left wondering if the story is not repeating itself.
Nevertheless N. Mačiulis points out that certain fundamental metrics can show whether there is trouble looming.
“One of them is the ratio of citizen debt to income, but Lithuanians are, according to Eurostat, the least indebted in the EU,” says N. Mačiulis.
The dynamics of this metric has displayed no issues in the past year either.
Another metric highlighted by the economist was the home affordability index. N. Mačiulis said that in 2006-2007 this metric showed that the situation was unsustainable, but currently housing is sufficiently affordable in Vilnius.
“Of course we can look at just the trends of price and wage rises. We can see that up to 2008 prices rose faster than wages, while in the post-crisis period the two have been practically parallel,” said the economist.
Another metric which N. Mačiulis used to evaluate whether a bubble is forming is construction expenses. It too shows no problems in the Lithuanian capital so far.
“The profitability of rent could show problems, but both in Vilnius and in other big cities around the country this metric is also close to the historical average,” the economist said, concluding that “The situation in the Vilnius housing market is normal.”
Remembering the speculation era
“Does every price rise have to end in a bubble? Perhaps not,” said Ober-Haus evaluation and market research department head Saulius Vagonis.
The Ober-Haus index shows that real estate prices in Lithuania have returned to 2006, but the peak of 2007 has not yet been reached.
“The real housing price change over the past five years in some Lithuanian cities has in fact been negative (taking into account inflation),” said S. Vagonis.
As such he claimed that there is no real reason to even discuss the formation of a housing bubble in Lithuania.
The question could only perhaps be raised in Vilnius where prices rose significantly faster than in other cities.
“However affordability remains stable, other metrics as well,” the real estate expert said.
Vagonis claimed that one of the main things which resulted in the formation of the 2008 bubble was the lack of a bad experience.
“The speculation “success stories” also contributed because most people had friends who made thousands just from purchasing and later reselling apartments,” he recalled.
Lessons of 2008
“We are monitoring the housing market because we are most active in it. Based on transactions the cycle is at its top, but what I would like to draw attention to is that in Vilnius the price of new housing has strongly risen. This shows that people are thinking about lasting value,” Domas Dargis, the general director of Eika group said.
He noted that in 2007 there were also many sales of new housing, but added that at the time the housing quality was far lower.
“Based on segments (economy, intermediate and prestige class) in 2016 we observed that there are more purchases of specifically the intermediate class. This means that people are looking to the future,” said D. Dargis.
The businessman stated that currently more than half (57%) of the developers active in the market are those who survived the 2008 real estate bubble.
“The number of transactions has almost reached the level of 2008, but prices have not,” stressed Dargis.
He also recounted that more and more people buy housing as investment, among Eika clients they make up around a third (31%).
“Responsible borrowing has likely influenced the market, but in our opinion this has not happened. Banks are more careful with lending, but this has had no impact on the market and adds security to us, the developers,” the head of Eika said.
D. Dargis claimed that they have learnt from the previous bubble that it is necessary to remain wary.
“The main thing which saved us and would likely save us in the future is other income from commercial property rent. Thus we would have alternative income sources,” he said.
The businessman also stated that currently Eika is gathering a reserve, which is not cash stored in a bank, but liquid assets.