The construction price index increased in 2015

According to Statistics Estonia, in 2015, the construction price index rose 0.5% compared to the average of 2014.

Labour costs increased by 2.9%, costs of building machines decreased by 0.8% and costs of building materials decreased by 0.7%.

In the 4th quarter of 2015 compared to the 3rd quarter, the change of the construction price index was -0.1% and compared to the 4th quarter of 2014 the change was 0.7%. Compared to the 3rd quarter of 2015, the index was mainly influenced by the depreciation of building materials, which gave more than half of the quarterly change. Compared to the 4th quarter of 2014, the construction price index was also mainly influenced by an increase in labour costs, which accounted more than 75% of the total increase.

The repair and reconstruction work price index remained at the same level in 2015 compared to the average of 2014. Labour costs increased by 2.3%, costs of machines decreased by 2.3% and costs of building materials decreased by 1.4%.

The change of the repair and reconstruction work price index in the 4th quarter of 2015 was -0.1% compared to the 3rd quarter, and -0.2% compared to the 4th quarter of 2014.

The calculation of the construction price index covers four groups of buildings: detached houses, blocks of flats, industrial buildings and office buildings. The repair and reconstruction work price index covers office buildings. The construction price index expresses the change in the expenditures on construction taking into consideration the price changes of three basic inputs: labour force, building materials and building machines.

Change in the construction price index, 4th quarter 2015
3rd quarter 2015 – 4th quarter 2015, % 4th quarter 2014 – 4th quarter 2015, %
TOTAL -0.1 0.7
labour force 0.4 3.7
building machines -0.5 -1.9
building materials -0.3 -0.7
Index of detached houses 0.1 0.5
Index of blocks of flats 0.1 -0.4
Index of industrial buildings -0.5 0.9
Index of office buildings 0.0 0.9

 

Change in the repair and reconstruction work price index, 4th quarter 2015
3rd quarter 2015 – 4th quarter 2015, % 4th quarter 2014 – 4th quarter 2015, %
TOTAL -0.1 -0.2
labour force 0.4 2.5
building machines -0.5 -3.1
building materials -0.3 -1.9

Source: Statistics Estonia

Iconic Balti Jaam market goes under renovation

The iconic Balti Jaam market, named after Tallinn’s central railway station next door, will move to a new location until spring 2017, when renovation work on the old site should be complete.

The outdoor market will close on January 1 and reopen at the beginning of February at Telliskivi 62, a few hundred meters away from the current location. An outdoor food court is also planned next to the location. As part of the food court project, an old train carriage will be turned into a dining car.

Head of the Balti Jaam market, Andres Rjabov, said the limestone walls will be kept intact but a roof will be built over the currently open-air market. The new market will have three stories and an underground floor.

He said much will remain the same, such as the sale of fruits, vegetables, clothes and antiques, but improvements will also be made, such as the addition of a beer hall and modern street food stalls.

By spring of 2017, a new modern market complex should be complete.

The market is popular among tourists and locals alike, having seen very little renovation work since the Soviet period. Besides vegetables, fruit and other food, one can also buy Soviet-era antiques.

Source: ERR via Estonian Review

 

Construction volumes decreased in 3Q

According to Statistics Estonia, in the 3rd quarter of 2015 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries decreased 5%. If only the Estonian construction market is taken into account, the construction volumes decreased 10%.

In the 3rd quarter of 2015, the production value of construction enterprises amounted to 614 million euros, of which the production value of building construction was 370 million euros and the production value of civil engineering was 244 million euros. Compared to the 3rd quarter of 2014, the volume of building construction in real terms stayed on the same level and the volume of civil engineering decreased by about a tenth.

Compared to the same period of 2014, the domestic construction market was influenced the most by a decrease in civil engineering. There was also a decrease in repair and reconstruction work in building construction. At the same time, new building construction continued to grow.

The construction volume of Estonian construction enterprises in foreign countries increased by more than a half compared to the 3rd quarter of 2014, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 13% of the total volume of construction in the 3rd quarter of 2015.

According to the data of the Register of Construction Works, in the 3rd quarter of 2015, the number of dwelling completions was 985, i.e. two times more than in the same period of 2014. More than a half of the completed dwellings were situated in blocks of flats. The majority of completed dwellings were situated in Tallinn.

There is still a demand for new dwellings with a good location and high quality. In the 3rd quarter of 2015, building permits were granted for the construction of 1,512 dwellings, which means that the number of building permits issued increased by a half compared to the 3rd quarter of 2014. The most popular type of building was block of flats.

The number of completed non-residential buildings was 292 with a useful floor area of 166,300 square metres – this consisted primarily of new industrial, storage and commercial premises. Compared to the 3rd quarter of 2014, the useful floor area as well as the volume of completed non-residential buildings decreased.Diagram: Construction volume index and its trend, 1st quarter 2000 – 3rd quarter 2015

Source: Statistics Estonia

The risks to financial stability in Estonia have increased slightly

  • The risks to financial stability in Estonia have increased slightly, though they remain small
  • Weak external demand and rapidly rising labour costs are hurting the ability of companies to repay loans
  • The credit and real estate boom in Sweden and Norway is increasing the risks to banks operating in Estonia
  • Steps have been taken in the Nordic countries to contain the boom, but they have not been sufficient in Sweden
  • Rapid growth in incomes and low interest rates on loans are boosting the rise in property prices
  • The countercyclical capital buffer will probably be 0% for the next half year

International financial markets have been affected by the continuation of very accommodative monetary policy and by the increased risks in emerging markets. Bond yields continued to fall at the start of the year and stock markets to climb. In the spring there was uncertainty because of Greece, as negotiations about the debt programme dragged on, and because of the expectation for further US monetary policy decisions. On top of this came the impact of the correction that started at the end of summer in the Chinese stock market. Falling prices spread to other large stock markets and also affected the price of shares listed on the Tallinn stock exchange.

Estonian economic growth slowed a little in the first half of 2015, to 2% over the year in the second quarter. The growth was largely based on rising private consumption, which was driven by increased employment and rapid wage rises. Higher incomes and low base interest rates back up the ability of households to pay their loans. Estonian exports were smaller in the first eight months of this year than at the same time last year, and the outlook for growth in Estonia’s main export partners has deteriorated. Labour costs have continued to rise for Estonian companies relatively rapidly, and this has reduced the profitability of those companies. The risk has increased that the profitability of Estonian companies will be reduced even further by weak foreign demand and rapidly rising labour costs. This could weaken the ability of companies to pay their loans and thus worsen the loan quality of banks.

Increased credit volumes and continuing rises in real estate prices in Sweden and Norway have increased the risks to financial stability for the whole economy. The Swedish banking groups that make up a large part of banking in Estonia get the majority of their funds using market-based financing. This makes them vulnerable to changes in the risk sentiment of financial markets. If financial markets were to reassess the risks to the Nordic economies and banks, it would increase the financing and liquidity risks of the banks operating in Estonia. If interest rates were to rise and loan servicing costs increase, or real estate prices to fall, the high indebtedness of Nordic households could lead them to consume less, and this would then affect the revenues of Nordic companies and their ability to repay their loans. As the Nordic countries are an important export market for Estonian companies, this would have an impact on growth in Estonia. To reduce such risks, it is important that macroprudential measures be taken, some having already been taken with a view to strengthening the banks. Sweden still needs to do more, particularly to contain the rise in property prices and indebtedness.

Rising incomes and low interest rates have increased the risk of the rise in Estonian real estate prices accelerating, and lending becoming concentrated in the real estate sector. Average prices for apartments have risen relatively fast, but the share of borrowing in financing for residential property purchases has not risen at the same time. There has been more activity in real estate development for both residential and commercial space, and the growth in loans to developers has become faster. For the sake of financial stability it is important that lenders and borrowers remember that the extremely low interest rates could rise and the cost of servicing loans could increase.

Low base interest rates and bond purchases by central banks have led bond yields to fall. This has made investors more interested in alternative assets. Increased appetite for risk has led asset prices to rise and has increased the risk that they may fall sharply. Low interest rates also affect the ability of financial institutions to earn income. This is reflected in a slight reduction in the net interest income earned by the banks operating in Estonia. More vulnerable to interest rates remaining low are life insurance companies, whose liabilities largely consist of insurance contracts with guaranteed interest rates. As life insurance is only a small part of the Estonian financial sector, and the insurers have sufficient buffers, the risk to Estonian financial stability from this vulnerability is modest.

As the macroprudential supervisor, Eesti Pank monitors and analyses the risks to the functioning of the financial system and where necessary takes measures to reduce such risks. One way Eesti Pank can reduce the risks from loan growth is by introducing a countercyclical capital buffer requirement. As loan growth is set to be in line with general economic developments for now and for the near term, the countercyclical capital buffer will probably be 0% for the next half year.

Source: Bank of Estonia

Construction prices increased as a result of wage pressures

According to Statistics Estonia, in the 3rd quarter of 2015, the construction price index increased 0.2% compared to the 2nd quarter of 2015, and 0.6% compared to the 3rd quarter of 2014.

In the 3rd quarter, compared to the same quarter of the previous year, the construction price index was influenced the most by the increasing cost of labor which accounted for over three-quarters of the total increase of the index.

Compared to the previous quarter, labor costs increased 1.7%. Spending  on  machinery  and  construction  materials fell by  0.8% and  0.6%, respectively.

The repair and reconstruction work price index increased by 0.2% in the 3rd quarter of 2015 compared to the 2nd quarter, and fell by 0.1% compared to the 3rd quarter of 2014.

The calculation of the construction price index covers four groups of buildings: detached houses, blocks of flats, industrial buildings and office buildings. The repair and reconstruction work price index covers office buildings. The construction price index expresses the change in the expenditures on construction taking into consideration the price changes of three basic inputs: labour force, building materials and building machines.

Change in the construction price index,

3rd quarter 2015

2nd Q 2015 – 3rd Q 2015, % 3rd Q 2014 – 3rd Q 2015, %
TOTAL 0.2 0.6
labour force 1.7 3.4
building machines -0.8 -2.1
building materials -0.6 -0.7
Index of detached houses 0.2 0.3
Index of blocks of flats -0.4 -0.8
Index of industrial buildings 0.3 1.5
Index of office buildings 0.2 0.7

 

Change in the repair and reconstruction work price index, 3rd quarter 2015
2nd Q 2015 – 3rd Q 2015, % 3rd Q 2014 – 3rd Q 2015, %
TOTAL 0.2 -0.1
labour force 1.7 2.6
building machines -2.0 -4.3
building materials -0.7 1.5

Source: Statistics Estonia

Risks at the housing market

• Growth of house prices one of the fastest in Europe
• House prices have grown faster than households’ incomes
• Surge in supply should slow future price growth

Growth of house prices one of the fastest in Europe
Of the 27 countries Eurostat has data for, Estonia has seen, since 2010, the biggest increase in dwelling prices. The prices of apartments (which amount to around 75% of all purchase-sale transactions in real estate) have increased the most, by around 11% a year since 2011. Higher incomes are enabling households to improve their living standards. Real estate is also an attractive investment option, as nominal interest rates for loans and deposits are very low and housing rents have increased substantially. Construction prices have also risen a bit since 2010, but much less than dwelling prices.

House prices have grown faster than households’ incomes
Since 2010, the prices of dwellings in Estonia have risen faster than average net wages. Since mid-2014, a fall in interest rates has improved housing affordability somewhat for those who wish to purchase a dwelling with a mortgage. Despite the fast increase in real estate prices, demand for housing has grown, and the number of purchase-sale transactions has been rising since 2012. Although demand for housing loans has increased in line with the rise in activity on the real estate market, the role played by the loan market has been smaller, and lending more conservative, than during the previous growth cycle.

Surge in supply should slow future price growth
Construction data show that the development of new dwellings has picked up in 2014-2015. A substantial number of new dwellings has reached or will reach the market soon. The larger supply should reduce the growth of real estate prices, especially in the apartments segment.

Source: Swedbank

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Government buys land on Estonian border

Four in five owners of land on the Estonian-Russian border have given their consent to clearing their land on the border strip of trees and bushes and the Interior Ministry will start making offers to buy the land at the end of this month.

At the moment 77 owners of privately held land plots or about 80 percent of landowners have given their consent to clearing of the border strip, spokespeople for the Interior Ministry told BNS. The ministry is planning to buy up all the land that constitutes the border strip by the end of this year.

Interior Minister Hanno Pevkur, who visited south-eastern Estonia for the cornerstone laying ceremony of the new complex of the border guard base at Piusa on Monday, met with the landowners who have allowed work to be done on their land to thank them for cooperation.

“Evaluation of the land under the border strip will begin already at the end of this month, at the same time making of proposals to landowners to sell the land under the border strip will begin,” Pevkur said. He said the ministry wishes to make just offers for the land and expects to be able to avoid expropriation. “We are planning to transfer all the pieces of land under the border strip that are currently in private ownership by the end of 2015,” Pevkur said.

Seventy-two kilometres of the border between Estonia and Russia making up approximately 200 hectares of the roughly 300 hectares of land constituting the border strip has been cleared of high-growth vegetation by now. The work will continue through the summer.

Source: BNS News

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