BNN ANALYZES | Lithuania’s central bank suspicious of overheating property market and avoids bursting – Baltic News Network

Linas Jegelevičius for the BNN

Lithuanian banks’ home loan portfolio grew much faster than any other euro zone country this year, suggesting that the country’s booming property market may be overheating, says Gediminas Šimkus, head of the Lithuanian bank. Real estate prices have risen at record speed, he says, currently 17 percent above the previous year.

“According to the registry center, there were 30 percent more property purchase agreements this year than in the same period last year and 25 percent more than in 2019,” says Šimkus.

But some economists like Sigitas Besagirskas downplay fears about what the head of the central bank is saying as problems emerging in the market. “I think the fears have not been confirmed – we will not see the market overheating in the new future, although some signs (in the market) may appear worrying. The availability of money from the EU infrastructure funds (which will be distributed soon) will significantly increase the money supply in the country… ”Besagirskas told BNN.

However, the Bank of Lithuania does not take any chances as any upheaval in the housing market could lead to a destabilization of the country’s financial system. The Lithuanian bank announced new initiatives this week aimed at keeping things under control. The bank is proposing to introduce a universal property tax payable by all owners.

According to Šimkus, a general and socially oriented non-commercial real estate tax would strengthen the sustainability of the housing market and limit the unfounded incentives to invest in real estate.

“I believe that such a move could reduce Lithuanians’ obsession with real estate, but not by much. Ironically, the Lithuanians do not want to invest in bonds, art, gold – only real estate satisfies their hunger for investments, ”Besagirskas told BNN.

The Bank of Lithuania has made proposals to the Ministry of Finance to apply real estate tax to all real estate without exception by setting a minimum tax-free real estate value limit to protect the most vulnerable residents. The tax should be progressive, ie the initial tariff should be very low, e.g. 0.1%, and increased for very high quality and luxury properties. This would mean that the tax for the majority of residents would be several dozen euros annually and would be more symbolic in regions where the housing value is lower or the apartment would not be taxable.

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On the other hand, properties costing hundreds of thousands of euros or luxury properties costing millions of euros would be subject to significantly higher taxes, which amount to hundreds of thousands or even thousands of euros. It is estimated that it could raise over € 150 million in the treasury.

Lithuania’s Prime Minister Ingrida Šimonytė said the Seimas, the country’s parliament, could discuss the proposal at the parliament’s spring session.

Between January and September of this year, according to the governor of the Bank of Lithuania, Lithuanian banks issued 50 percent more home loans than in the same period in 2019. At the same time, the country’s banks and credit unions grew the home loan portfolio by more than 11 percent – the highest Rate in the euro area.

“If the trends continue, we could face serious challenges for our financial stability in the event of a correction in the housing market,” said Šimkus during the central bank’s annual real estate conference on Tuesday, November 23rd. “Double-digit increases in housing prices have been reported in most European countries, while the overall pace in the EU has been the fastest since 2007,” he said.

The central bank governor says that housing in Lithuania is still relatively affordable, although it is currently 7 percent overpriced.

To protect the market, the Board of Directors of the Bank of Lithuania has already approved the amended Responsible Lending Regulations, which introduce a higher down payment requirement for the second and subsequent loans, and intends to pass a systemic risk buffer (SRB) decision of 2 percent for. to summarize the home loan portfolio of loan issuers.

According to the Bank of Lithuania, the total flow of new loans could shrink by up to 10% and house price growth by up to 3 percentage points due to the tightened down payment requirements and the proposed SRB for the home loan portfolio of loan issuers.

A doubled minimum down payment obligation for second and follow-up loans of 30% is likely to affect around 40% of people who take out their follow-up loans. This proportion of individuals should have to pay a larger deposit. Home loan interest rates should not be affected by the above measure. They could only increase by 0.05 percentage points due to additional capital requirements.

Currently, new home loans are issued at an average interest rate of 2.12%. It has fallen by 0.25 percentage points since the beginning of the previous year.

Another measure is the mandatory registration of preliminary purchase contracts for undeveloped living space. Such a change in the law would contribute to the transparency of the primary market, says the Bank of Lithuania. In real time, it claims the transaction and price development in the primary housing market, the extent of speculative transactions, in order to better understand the risks of overheating of the housing market and to take measures to mitigate these risks.

The Bank of Lithuania has submitted proposals to the Ministries of Justice and Environment for mandatory registration of agreements and is waiting for their conclusions.

Finally, the sustainable development of the market would be facilitated by reduced shadow activities in the real estate sector, according to the Bank of Lithuania, for example by legitimizing the obligation to make the down payment or even the entire home purchase transparent and to limit the payment for real estate in cash.

Apparently, the initiatives are already having an impact on Lithuanians’ affinity for real estate.

“Surprisingly, there was a significant slowdown in purchases of new houses and apartments in Palanga this fall. I felt that now people would rather wait and see what happens next, ”Regina Lingė, a real estate agent in Palanga, told BNN.

The resort has seen a record RE price increase of up to 20 percent this year. Similar growth was recorded in Vilnius.

But the real estate market is booming elsewhere. Alvydas Guginis, owner of NekTur Group, a real estate company in Naujoji Akmenė, a municipality in northwest Lithuania, told BNN that local property prices have skyrocketed by almost 1000 (!) Percent in the last 10 years. “This year alone they have risen to 20 percent here. The growth was mainly driven by the opening of a large factory by Vakarų medienos grupė, a large woodworking and furniture manufacturer that works with IKEA, ”he says.

In other Lithuanian cities, too, real estate prices rose from 10 to 20 percent this year.

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