Construction volumes stayed on the level of the previous year in 3Q

According to Statistics Estonia, in the 3rd quarter of 2016 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries increased 0.5%.

In the 3rd quarter of 2016, the production value of construction enterprises amounted to 612 million euros, of which the production value of building construction was 398 million euros and the production value of civil engineering was 214 million euros. Compared to the 3rd quarter of 2015, the volume of building construction increased 8% and the volume of civil engineering decreased 11%.

The domestic construction market is still influenced the most by a fall in civil engineering volumes. There was also 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 1.4% compared to the 3rd quarter of 2015, 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 2016.

According to the Register of Construction Works, in the 3rd quarter of 2016, dwelling completions numbered 1,061, i.e. 84 dwellings more than in the same period a year ago. More than a half of the completed dwellings were situated in blocks of flats. The majority of completed dwellings were situated in Tallinn and in the rural municipalities in the vicinity of Tallinn.

There is still a demand for new high-quality dwellings in a good location. In the 3rd quarter of 2016, building permits were granted for the construction of 1,485 dwellings, which is slightly fewer than in the 3rd quarter a year ago. The most popular type of building was a block of flats.

The number of completed non-residential buildings was 216 with a useful floor area of 194,000 square metres – this consisted primarily of new commercial, industrial and storage premises. Compared to the 3rd quarter of 2015, both the useful floor area and the volume of completed non-residential buildings increased.Diagram: Construction volume index and its trend, 1st quarter 2003 – 3rd quarter 2016

The statistics are based on the questionnaire “Economic activity, quarter”, the submission date of which was 20 October 2016. Statistics Estonia published the quarterly summary in 27 working days. For the statistical activity “Financial statistics of enterprises”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia

Estonian construction volumes increased in Q2

According to Statistics Estonia, in the 2nd quarter of 2016 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries increased 4%.

In the 2nd quarter of 2016, the production value of construction enterprises amounted to 525 million euros, of which the production value of building construction was 354 million euros and the production value of civil engineering was 171 million euros. Compared to the 2nd quarter of 2015, the volume of building construction increased 16% and the volume of civil engineering decreased 13%.

The domestic construction market was still influenced the most by a fall in civil engineering volumes, while building construction continued to grow. Compared to the same period of the previous year, there was a growth in new building construction as well as in repair and reconstruction work in building construction.

The construction volume of Estonian construction enterprises in foreign countries increased about a third compared to the 2nd quarter of 2015, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 12% of the total volume of construction in the 2nd quarter of 2016.

According to the Register of Construction Works, in the 2nd quarter of 2016, the number of dwelling completions was 1,325, i.e. 598 dwellings more than in the same period a year ago. 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 high-quality dwellings in a good location. In the 2nd quarter of 2016, building permits were granted for the construction of 1,817 dwellings, which is 6% more than in the 2nd quarter a year ago. The most popular type of building was a block of flats.

The number of completed non-residential buildings was 243 with a useful floor area of 192,000 square metres – this consisted primarily of new accommodation, commercial and storage premises. Compared to the 2nd quarter of 2015, both the useful floor area and the volume of completed non-residential buildings increased.

Diagram: Construction volume index and its trend

Source: Statistics Estonia

The construction price index decline in the second quarter

According to Statistics Estonia, in the 2nd quarter of 2016, the construction price index changed by -0.6% compared to the first quarter of 2016 and by -1.3% compared to the second quarter of 2015.

In the 2nd quarter of 2016 compared to the same quarter of the previous year, the construction price index was influenced by the decrease in the cost of building materials, which provided over three-quarters of the total decrease of the index.

Compared to the previous quarter, prices of building materials fell by 0.9% in the 2nd quarter of 2016. The costs of building machines fell by 0.7% and labour force costs by 0.2%.

The repair and reconstruction work price index changed by -1.1% in the 2nd quarter of 2016 compared to the 1st quarter and by -1.6% compared to the 2nd quarter of 2015.

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, 2nd quarter 2016
1st quarter 2016 – 2nd quarter 2016, % 2nd quarter 2015 – 2nd quarter 2016, %
TOTAL -0.6 -1.3
labour force -0.2 2.1
building machines -0.7 -1.8
building materials -0.9 -3.0
Index of detached houses -0.9 -0.9
Index of blocks of flats 0.1 -1.0
Index of industrial buildings – 1.4 -1.9
Index of office buildings -0.5 -1.2
Change in the repair and reconstruction work price index, 2nd quarter 2016
1st quarter 2016 – 2nd quarter 2016, % 2nd quarter 2015 – 2nd quarter 2016, %
TOTAL -1.1 -1.6
labour force 0.0 1.8
building machines 0.6 -2.4
building materials -2.0 – 3.8

Source: Statistics Estonia

Estonian housing market risks diluted

  • The surge in supply has almost halted price growth
  • Construction sector investments low
  • Real estate prices relative to income stay below 12-year average

Price – it is all about demand and supply

In the first quarter of 2016, price growth of apartments in Estonia almost came to a halt due to increased supply. Even though 6,000 dwellings have been added in Tallinn in the last five years, the ratio of individuals per dwelling has been on the rise. In Tartu, the second-biggest city in Estonia, the situation is less tense. Price pressure has been fiercer in Tallinn and the difference between price per square meter in Tallinn and Tartu has increased from 50 to 350 euros. In the second quarter of 2016, annual price growth accelerated to 1.8%, a notch up from first quarter result of 0.7%, but in general, the market has stabilised, whereas the median price has a clear trend downwards. Due to increased supply and sale adverts of newer dwellings, competition has pushed down the prices of newer apartments, making them more attractive. As interest rates are low and newer houses have lower maintenance costs, the extra a customer has to pay to cover the price difference with a loan has decreased to a marginal value.

Low investments in the construction sector 

The drop in the prices of new apartments is good news for potential clients, whose income has grown substantially and now exceeds real estate price growth. Wages have grown in the construction sector as well. This, combined with lower sales prices, has hit investments of construction companies.

Is the price of real estate too high? 

Apartment prices are closing in to the level of the 2007 real estate boom in nominal terms, —they are only 12% lower on average. The situation is not even close to the conditions of the 2007 real estate boom when prices are compared to income. Prices relative to income have recovered from the bust that followed the boom and stay below the 12-year average level. In fact, they even dropped in the first quarter of 2016. Whereas in 2007 the average worker needed to pay 2.5 times the average net salary to buy one square meter of apartment space, he/she now needs only 1.7 average net wages in a given region.

We expect that this year the prices of real estate will stay relatively stable. Low interest rates continue to support demand for dwellings and lending growth. The amount of started construction projects should keep up the necessary supply of new dwellings.

Source: Swedbank

The annual growth of the Dwelling Price Index was 2 pct

According to Statistics Estonia, in the 1st quarter of 2016, the Dwelling Price Index changed by -0.1% compared to the 4th quarter of 2015 and by 2% compared to the 1st quarter of 2015.

Compared to the previous quarter, the prices of apartments decreased by 0.2% and the prices of houses remained on the same level.

Compared to the 4th quarter of 2015, the prices of apartments decreased by 1.5% in Tallinn and increased by 1.8% in areas bordering Tallinn with Tartu and Pärnu cities and by 3.2% in the rest of Estonia.

Compared to the 1st quarter of 2015, the prices of apartments have increased by 3.1% and the prices of houses decreased by 0.5%. Compared to the 1st quarter of the previous year, the prices of apartments remained on the same level in Tallinn, but increased by 9.9% in areas bordering Tallinn with Tartu and Pärnu cities, and by 6.8% in the rest of Estonia.

The previous time that the yearly change in the Dwelling Price Index was smaller than 2% was in the 1st quarter of 2010 when it was -5.5%.

The Dwelling Price Index expresses the changes in the transaction square metre prices of dwellings purchased by households. The Dwelling Price Indices have been compiled for apartments and houses (including detached, semi-detached and terraced houses).

In the 1st quarter of 2016, the Owner-Occupied Housing Price Index changed by -1.1% compared to the 4th quarter of 2015 and by -3.5% compared to the 1st quarter of 2015.

The Owner-Occupied Housing Price Index expresses the changes in the prices of the acquisition of dwellings new to the household sector and other goods and services that households purchase in their role as owner-occupiers. The index consists of four parts: the acquisition of dwellings, other services related to the acquisition of dwellings, major repairs and maintenance, and insurance connected with dwellings.

The Owner-Occupied Housing Price Index is published on the base 2010 = 100. The time series starts from the 1st quarter of 2005; major repairs and maintenance are included from the 1st quarter of 2007 and insurance connected with dwellings is included from the 1st quarter of 2012.

Source: Statistics Estonia

Construction volumes increased in the 1st quarter

According to Statistics Estonia, in the 1st quarter of 2016 compared to the same quarter of the previous year, the total production of Estonian construction enterprises in Estonia and foreign countries increased 3%. If only the Estonian construction market is taken into account, the construction volumes increased 5%.

In the 1st quarter of 2016, the production value of construction enterprises amounted to 374 million euros, of which the production value of building construction was 289 million euros and the production value of civil engineering was 85 million euros. Compared to the 1st quarter of 2015, the volume of building construction increased 12% and the volume of civil engineering decreased about a fifth.

The domestic construction market was still influenced the most by a fall in civil engineering volumes. 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 decreased 8% compared to the 1st quarter of 2015, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 9% of the total volume of construction in the 1st quarter of 2016.

According to the Register of Construction Works, in the 1st quarter of 2016, the number of dwelling completions was 990. The same number of new dwellings was also completed in the same period a year ago. 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 high-quality dwellings in a good location. In the 1st quarter of 2016, building permits were granted for the construction of 1,347 dwellings, which is more than a half more than in the 1st quarter a year ago. The most popular type of building was a block of flats.

The number of completed non-residential buildings was 304 with a useful floor area of 118,000 square metres – this consisted primarily of new commercial and storage premises. Compared to the 1st quarter of 2015, both the useful floor area and the volume of completed non-residential buildings decreased.Diagram: Construction volume index and its trend

Source: Statistics Estonia

Risks to financial stability are small

  • The risks to financial stability in Estonia in the near future are small
  • The ability of households to repay their loans remains good and is supported by rapid growth in incomes
  • The ability of companies to repay loans may deteriorate in future if profitability continues to decline
  • The rapid growth in loans and real estate prices in Sweden has not been reduced despite the efforts of the authorities
  • Rising real estate prices in Sweden pose risks to the Estonian economy and the banks operating here
  • The capital buffers of the banks may change as it is planned to require the commercial banks to hold systemic buffers of 1% rather than 2% from August
  • It is planned to apply an additional systemically important bank buffer of 2% to Swedbank and SEB

The risks to Estonian financial stability in the near future are small. Although there is a lot of uncertainty coming from the external environment, the risks to the functioning of the financial sector are reduced by the financial buffers of companies, the relatively good finances of households, and the high levels of own funds in the banking sector.

The international financial environment became less confident at the start of 2016. The uncertainty about the outlook for global growth led to falls on international securities markets. The banking sector in the European Union is facing a large share of bad loans, weak economic growth and low monetary policy interest rates. The risks are made worse by the large debts of many European countries and by the possibility that the United Kingdom might leave the European Union.

Estonian economic growth in 2015 was the slowest of the past six years. Growth mainly slowed because of the economies of several neighbouring countries were weak and there were fewer export opportunities. The acceleration of Estonian economic growth will depend a lot on how the  target markets for exports perform. Despite the slower growth, the ability of Estonian companies and households to repay their loans remains good. For households this was supported by faster growth in incomes while indebtedness remained at the same level. The profitability of companies was reduced by weak foreign demand and rapidly rising labour costs. If profitability continues to decline, the ability of companies to repay their loans may deteriorate in future, and this could worsen the loan quality of the banks.

Although Sweden has taken measures to reduce the risks related to rising real estate prices, rapid growth continued in loans collateralised by real estate and in real estate prices. The high debt level of Swedish households poses the danger that a fall in real estate prices or an increase in loan servicing costs could reduce household consumption. This would affect economic development in the Nordic and Baltic region and lower demand for the output of Estonian companies. It could also increase the liquidity risks of banks operating in Estonia and the risk to the financing of the economy, as the liquidity management of the biggest banks in Estonia is tightly integrated with their parent groups.

Real estate prices rose more slowly in Estonia in 2015 but low interest rates and relatively fast wage growth mean that the risk of excessive growth in real estate prices and in lending remains. To reduce the risk of a credit boom in the future, Eesti Pank took precautionary steps last year by introducing limits on the issuing of housing loans. Eesti Pank stands ready to tighten the current requirements in future and to restrict the use of exceptions if there is a significant decline in the down payments of borrowers and if risks should increase.

To ensure the functioning of the financial system, Eesti Pank has introduced additional capital buffer requirements for the banks. Since 2014 they have been subject to a systemic risk buffer of 2%. The buffer is intended to increase the resilience of the banks so that they could cope with a sharp drop in the economy, and to reduce the risks that come from the concentration of the structure of the banking sector. Eesti Pank plans to change the principles behind the systemic risk buffer from August this year. All the banks operating in Estonia will have to hold a systemic risk buffer of 1%, rather than the current 2%, to mitigate the risks of a sudden economic downturn, which arise from Estonia having a small and open economy. The two systemically important banks, Swedbank AS and AS SEB Pank, will have to hold an additional buffer of 2% to hedge against the risks that come from the concentration of the banking sector. After the change, the two biggest banks operating in Estonia will have a total capital requirement of 13.5%, and all the other banks will have a requirement of 11.5%.

Source: Bank of Estonia