The last two decades have been good to Latvia Real Estate with house prices constantly growing. Reports now indicate that house prices have begun to fall in the Greater Riga area – a fall of 3.5% in the month of June 2007, following a fall 1% in May 2007, according to the leading Latvian real estate agent Latio. Prices have fallen “for the first time in history”, says Latio, which if not quite accurate, emphasizes the sense of shock.
Latvia was Europe’s strongest performing housing market with house price rises of 44.23% during the year, according to Latvia’s Central Statistical Bureau.
The Global Property Guide believes these latest figures signal the end of the Great Baltic House Price Boom. Estonia started falling before Latvia, as is normal in the Baltics. We have long suggested that low rental returns in the Baltics mean that investors should be very cautious.
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The decline of house prices also reflects economic problems which have accumulated in Latvia
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The current account deficit rose to 26.3% of GDP in 4Q 2006, from 15.2% a year earlier.
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Inflation was sharply up at 8.9% in April 2007, up from 6.5% last year, and 1.9% in 2002.
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Loans to residents grew 60.4% in the year to Q4 2006 (58.2% and 61.7% in the previous two years).
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Long-term interest rates are sharply up.
The price of good quality used apartments in prime locations in Central Riga ranges from €2,900 to €3,143 per square metre, according to the Global Property Guide (survey conducted 24 Nov 2006). Houses in similar locations are slightly cheaper, ranging from €2,521 to €2,700 per square metre.
In Riga, city centre average prices rose from around €1,264 per sq. m. in August 2004, to around €3,011 at end-2006 – a 138% increase in just over two years.
Meanwhile, in Riga average monthly rents have risen, but not nearly so much, from around €8.20 per sq. m. to around €12.64 per sq. m. – an increase of around 54%. Riga rental income returns (average for all sizes) have therefore fallen over the past two years, from around 7.85% to an average of 5.04% (the figures in the table above represent not average yields, but yields for apartments of 120 sq. m.).
These yields are not unreasonable. However in the particular situation of Latvia, such moderate yields, in the context of a continued very strong stream of new apartment offerings, and a sharp up tick in local long-term price of money, would make us tread carefully.
