Real estate blog

5-Jul-2024

It has been almost a month since the Governing Council of the European Central Bank decided to lower the refinancing rate by 25 basis points, or 0.25%, to 4.25%. 

Let's take a look at how this has affected EURIBOR rates, which are lending charges in the interbank market and are used in lending. The 6-month EURIBOR rate has declined from 3.744% (6 June) to 3.678% (3 July). The 12-month EURIBOR rate has "fallen" from 3.684% to 3.596%, or by 0.088%. What does this mean for borrowers? Let's assume a loan amount of EUR 70 000, a loan term of 20 years and a first instalment of 5% with ALTUM support. Of course, there are other conditions that affect the interest rate of the bank loan, but all in all, the EURIBOR reduction is a EUR 2-3 reduction in the borrower's monthly payments! This saves borrowers the price of one or two public transport fares... Why was the long-awaited ECB decision to cut the refinancing rate not reflected in a EURIBOR cut? Credit institutions had priced it into their forecasts or expectations long in advance and rates on the interbank market were lower than they normally should have been. 

It is now 9 months since we made our forecast for the coming year. So far, this forecast is coming true. Let's see what happens next. I can now speculate that the rate cuts will be even more gradual than previously forecast. Will this have any impact on the property market? I think not. The wishes and expectations of people, banks, developers and others involved play a much bigger role. And unless something extraordinary happens, the market will be in its current state for some time.

Ivars Rubenis

3-May-2024

On 30 April, the government approved Latvia's Stability Programme for 2024-2028. Delfi.lv published an article on this topic "The end of the party - a tense situation in public finances". 

I quote the first paragraph "The end of the party, or the hangover, is how one could briefly describe what is expected in public finances in the coming years. After the big spending during the pandemic and the energy crisis, when the state generously supported citizens and businesses to help them cope with falling incomes and soaring prices, ... there will be little room for manoeuvre in the state budget in the coming years."

The document projects Latvia's gross domestic product growth at 1.4% in 2024, 2.9% in 2025, 2.5% in 2026 and 2.3% in 2027. I cannot see any logic in this string of figures. The Latvian economy is not a speedboat that can pick up speed one moment and then slow down the next. It is more like a container ship whose manoeuvres have to start several miles in advance. It should also be remembered that six months ago GDP growth was forecast at 2.5% in 2024, 2.9% in 2025 and 2.9% in 2026. So there has been a sharp fall in the forecast for this year, the next one has stayed the same and then there is a fall again. Given that GDP fell by 0.3% in 2023, these forecasts seem utopian.

For me, these figures make the Ministry of Finance's timid attempt to warn of a big problems all the more worrying, because the figures simply look made up. Also, it is unlikely that the stability programme foresaw the EUR 136 million of current investments in Air baltic which the government approved at the same meeting ...

In this context, it is not clear what the 50% of the Latvian public who expect property prices to rise this year are dreaming of. At least that is what the SEB House Price Survey shows. We are waiting for the ECB decision with the interest rate cut and we think that this will solve everything. This is a wrong view! Real estate prices are much more affected by the same factors as GDP - the war in Ukraine, the disruption in global supply chains, the weak economic situation of the main importing countries. And it is a mistake to think that everything will be bad in the country but wonderful in the real estate sector!

It is understandable that banks, builders, developers (and us, real estate agents) would be very happy if the property market would recover, but unfortunately it will not. Such surveys and their publication maintain the illusion of positive market trends and rising prices. George Soros once said that his word influences the market. Similarly, such surveys also influence the market. And expectations of the future are one of the factors influencing prices, but if a person cannot pay more for their home, then prices will not rise.

Obviously, after the party, somebody has to pay the bill.

Ivars Rubenis

4-Mar-2024

The banking sector is of the opinion that regional mortgage lending works. According to Swedbank, lending in the regions has increased by 5 percentage points. The highest activity has been in Jelgava, Ogre, Valmiera, Ventspils and Sigulda. Here it would be important to understand whether this increase is related to the regional centres or to, say, Pilteni in Ventspils, Naukšēni in Valmiera and Birzgale in Ogre. Given that a number of our clients have had problems obtaining loans to buy property in the regions, I can assume that the increase is, however, related to the regional centres. If we look at specific regions, 51.9% of the loans in the regions relate to the 5 cities mentioned above and Liepaja. These cities should not be included in the statistics describing lending in the regions. The price per square metre of a standard apartment in Valmiera and Naukseni differs 10 times!

Mortgage lending in rural areas is insufficient. This is also confirmed by Swedbank's own statement that the development of regional lending would require a state support programme, as property prices are lower than construction or renovation costs. In such a situation, property developers will not invest in the regions either. There is a combination of factors, such as ability to pay, opportunity costs (new vs. old), lack of infrastructure (roads, schools, kindergartens, shops), which prevent property prices from rising to real costs and hold back the development of mortgage lending in the regions. It is often difficult to say what is the cause and what is the effect. A comprehensive approach is needed to solve the problem. 

On 28 February, Delfi published an article "Post offices will not be closed for the time being, locations where services could be provided will be assessed". A bit of history: as the headline suggests, the post offices were supposed to be closed, but they will not be for the time being, because people on social networks were making a fuss, which led to some action by the ministry responsible, which led to the removal of the council. 

Behind all the political theatre, however, it is important for the real estate sector that the post offices in the regions remain. The Latvian Post in the regions performs the function of a social institution and an infrastructure facility. The closure of post offices would certainly not contribute to the population. The existence of population means that people need housing. This in turn means that there is a property market. So from a real estate point of view, the keeping of post offices is positive.

Of course, the post office will not save the situation in the countryside. It is a pity that the Ministry and the Government lack motivation and do not have a strategic vision for the development of the regions, but the decision not to close post offices is one small step towards ensuring that the countryside does not die out.

Ivars Rubenis 

^{References:
Tvnet.lv 01.02.2024 "Housing market forecasts: when will interest rates fall and will property become more affordable?"
Delfi.lv 26.02.2024 "More is needed, but valuation limits: how the financing 'slice' for property purchase in the regions is emerging".
Delfi.lv 28.02.2024 "Post offices will not be closed for the time being, locations where services could be provided will be assessed"}

4-Jan-2024

More than 30 years have passed since the early 1990s, but sometimes it feels like we are still living in those crazy years of legal limbo and official anarchy. I was talking to a sell-side broker about a deal quite recently. Here was the broker who insisted that the payment for the property had to be made in the notary's office, that the buyer and the seller had to have their current accounts in the same bank so that it was possible to check payment immediately... Finally, there was a phrase like "the seller is always right!". Naturally, we did not go through with the transaction, because neither we nor the buyer were happy with this arrangement and communication. 

If the parties do not trust each other, there are options to either use an escrow account with a bank or a custody account with a notary. Both of these options prolong and make transactions more expensive. Both the notary and the bank will additionally carry out a scrupulous check on the buyer, the seller and the origin of the financing. All this takes time and involves double-checking information that has already been verified by the real estate agent. Of course, an escrow account or a notary's custody account is not a free of charge measure. 

In my opinion, the normal transaction procedure is when the parties agree on the terms of the transaction, agree and sign the contract (with or without earnest money beforehand), sign the request for registration which can only be submitted to the Land Registry together with a document of payment from the bank, then make the payment and submit the documents to the Land Registry. 

Why does this seem like a normal procedure to me? Because there are 3 instances - the real estate agent, the notary and the Land Registry, which verify the legal aspects and the reality of the transaction. And in all these instances it is several people going through these documents. In my professional life I have dealt with more than 500 properties and not once has there been a situation where the Land Registry did not approve a request for a registration! Yes, there have been times when a request for registration or a contract of sale has needed to be clarified, but even in those cases it has not been a rejected request for registration. Usually, the Land Registry informs of the need for corrections and the parties to the transaction have the opportunity to withdraw the documents submitted, clarify them and resubmit them.

Before the turn of the year, we were involved in a transaction where the buyer was a national of a European country. It was technically difficult for him to come here, sign the documents and make the transfer, because the banks in his country were on holiday. So he paid before signing the purchase contract!!! It's simple. 

Going back to the broker mentioned at the beginning, it is no wonder that people do not trust each other and many do not want to deal with estate agents. Obviously, it will take some time before everyone here trusts the institutions and mechanisms set up by the state. I hope you will trust us and choose to work with our estate agents!

Ivars Rubenis 

10-Dec-2023

In the last days of November, I took part in a survey conducted by SKDS to find out the state of the business environment in Latvia. The interview lasted about half an hour, and for a while I caught myself thinking that I always give lower and more negative ratings to different things. Then I started to think with myself about the possible reasons. Here I came up with 3 answers - I was in a bad mood, the SKDS questions were biased or maybe everything is really bad. Since I had agreed to the conversation, let's drop the bad mood. SKDS is a company with a name and a history, I would not like to believe in creating an artificial result. That leaves the third - maybe it really is all bad...

Looking back a few weeks, I realise that my concerns about the state of the business environment have been heightened by the National Security Commission. It has submitted amendments to the Land Registry Law to the Parliament for consideration, aimed at strengthening controls over foreigners and foreign-invested companies.

Comments on the proposed amendments have been submitted by the Foreign Investors Council of Latvia and the Real Estate Developers Alliance. The most explicit conclusion has been expressed by the Latvian Council of Attorneys at Law in its letter to the Saeima Legal Commission: "The Council draws the attention of the Commission to the fact that the draft law in its current wording will worsen the investment environment in Latvia by creating an unjustified administrative burden for foreign legal entities to acquire rights of action in Latvia".

Without going into all the details (which can be done on the Saeima website or in Ivars Pommers' Delfi article), I would like to quote part of a sentence from the description of the problem in the annotation of the draft law: "The existing procedure is incomplete, ... resulting in significant difficulties in data processing in respect of the persons concerned". 

So it turns out that a public body (the National Security Commission) is proposing to shift the administrative burden to someone else, because it sees itself as having a significant burden on data processing! What is the volume of data in question? According to the annotation, it is '23 195 natural persons'. Really?! This is a volume of data that is a burden on the state?! 

The justification for the annotation of the draft law begins with the fact that on 24 February 2022, the security situation in Europe has changed... Sorry, it is now the end of 2023! It took us more than a year and a half to identify the problem! The Parliament, when examining the draft law, set a deadline of 16 November 2023 for the submission of proposals. The Ministry of Justice asked for an extension until 29 February 2024, which was accepted. Seriously?! This is the deadline for the preparation of the opinion of a public body?! Two possible answers - the draft law of the National Security Commission is in a sad state or the Ministry of Justice is unable to prepare its opinion any sooner. Cool, a little over 2 years to identify the problem and propose amendments. The question is, when else will these amendments see the light of day and in what form?

Stakeholder organisations are getting involved and fighting for their right and their clients, but as an outside observer I doubt that they will succeed. If the farmers, with all their lobbying, press publications and representatives in Parliament, have already failed to achieve 5% VAT on fruits and vegetables, the others have very little chance. From the state's side, it could look like this - if you want to do business here, then pay! The real estate sector is not currently a place where there is a lot of free money. Some developers are in the business of plugging holes, diverting resources from less painful places to those that are burning more.

I do not even want to mention the further annotation. For example, to the question of whether the regulatory framework affects the business environment, the answer is "No"!!!

To sum up: 

We have a hard time, let others do it 
23 195 persons is a huge amount of data which is a problem for the country
It takes 2 years to identify the problem and possible solutions
It takes 4 months for one public authority to formulate an opinion on the long work of another public authority

Why am I touching this topic? It is important for us. As I pointed out in a previous blog "the real estate business always depends on the availability of external financing". Approving such amendments to the law will further reduce foreign capital, which in turn will reduce market activity and prices. This situation will certainly be exacerbated by the aid to borrowers approved by the Parliament. In any case, all this does not make us optimistic about the business environment or the market outlook, but let us wait for the Parliament's decision and then we will see...

P.S. If the responsible authorities are reading this, I hope they will take the criticism in good spirit.

Ivars Rubenis

5-Oct-2023

We could discuss what terms to use to describe what is happening in the property market. Some might say that the market is stagnating, others that it is languishing. It is taking more and more time to realise a property at market price. Latio, the leader in real estate brokerage, regularly carries out studies which show that the time to sell a property at market price has increased 3 (!!!) times in a year (July 2022 - August 2023). "Delfi Bizness" in its article "Is the new housing market dead? What the 'Top' Projects and Developers Show" analyses the extent to which the market for new and renovated housing has slowed down. One thing is clear: activity has fallen. 

In 2021 and 2022, the market saw a big price increase. People had high inflation expectations, money had been saved up from COVID compensation, foreign investment was available in Latvia, global demand for building materials, including timber, was rising, which pushed up the prices of forests and trees. These are just some of the factors that have pushed up selling prices in recent years. In previous years, everything was bought at any price. The rise was particularly high in the agricultural land and forestry sectors. Now the rise has stopped, but selling prices are where they have climbed. 

The big money from the Eastern neighbourhood has now left the market, the Scandinavian funds have taken a pause, the rise in EURIBOR has slowed down the mortgage lending market. Viljar Arakas, founder of EfTEN Capital, points out that "the real estate business has always depended on the availability of external financing, on bank loans".

High prices and lack of access to finance are the reasons why there is little money on the market and why buyers and sellers do not meet. Sellers can be understood very well, because nobody wants to sell cheaper if they could have done it more expensively before. This situation is a bit like a casino - the gambler often regrets afterwards that he did not stop playing earlier... 

One could say that the market is on pause and investors, developers and banks are waiting for EURIBOR to fall. Swedbank economist Oskars Niks Mālnieks forecasts that there will be no further rise in interest rates and a fall is expected as early as late spring next year. As I recall, before the last EURIBOR rate hike, there were also forecasts that EURIBOR would not be hiked again. I, as a normal person and as someone who works in this sector, would like to believe this forecast. But if even this dreamlike hope comes true, nothing will happen immediately. Banks are not going to throw loans at everyone, investors are not going to start investing and developers are not going to start pushing forward new projects immediately. It will take time for the market to recover and for processes to settle down. My speculative guess is six months. 

So what can we expect from the market in the coming year and beyond? In the next year, I don't think there will be any major changes. If someone needs to sell, they will have to reduce the price. Those who do not need to sell will wait. What will happen after that? They say that an economist is someone who then explains why things have happened differently. I don't want to predict, otherwise I'll have to explain afterwards...

Ivars Rubenis