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

Construction volumes decreased in 2014

According to the preliminary data of Statistics Estonia, in 2014 the total production of Estonian construction enterprises in Estonia and in foreign countries amounted to 2.1 billion euros, which is 3% less than in 2013. If only the Estonian construction market is considered, the construction volumes decreased 2%.

The production value of building construction was 1.3 billion euros and the production of civil engineering works totalled 809 million euros. Compared to 2013, the volume of building construction increased 3% and the volume of civil engineering decreased by a tenth.

The domestic construction market was influenced the most by a decrease in civil engineering volumes. Although, in the second half of 2014, the repair and reconstruction volumes in building construction also took a downturn, then considering the whole year, a small increase occurred. At the same time new building construction, which had taken an upturn already in 2013, continued its growth trend in 2014 as well.

The construction volume of Estonian construction enterprises in foreign countries decreased by a tenth compared to 2013, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 8% of the total volume of construction in 2014.

The number of dwelling completions increased for the third year in succession. According to the data of the Register of Construction Works, in 2014, the number of dwelling completions was 2,756, i.e. 677 dwellings more than the year earlier. The largest share of completed dwellings was situated in blocks of flats and every second dwelling had two or three rooms. The majority of completed dwellings were situated in Tallinn, in the neighbouring rural municipalities of Tallinn and in Tartu county.

There is still a demand for new dwellings with a good location and high quality. In 2014, building permits were granted for the construction of 3,941 dwellings, which is about a third more than in 2013. The most popular type of building was a block of flats.

In 2014, the number of completed non-residential buildings was 785 with a useful floor area of 529,000 square metres – this was primarily made up of new storage, industrial and agricultural premises. Compared to 2013, the useful floor area as well as the cubic capacity of completed non-residential buildings decreased.

In the 4th quarter, the construction market started growing again. In the 4th quarter of 2014, the production value of construction amounted to 596 million euros, which was 6% more than in the 4th quarter of 2013. The increase was primarily caused by the low reference base of the last quarter of 2013 in terms of civil engineering volumes.Diagram: Construction volume index



Source: Statistics Estonia

Radisson hotel building sold for 46 MEUR

Eften Real Estate Fund II that belongs to Eften Capital has acquired the real estate and operator company of Radisson BLU Sky hotel in Tallinn for 46 million euros, Eften Capital said today.

In addition to the hotel and its operator Astlanda Hotelli, the fund acquired a 3,000 square meter office building and a popular pub, Madissoni.

The new owners plan no changes in the management of the hotel and it will continue to operate under the Radisson Blu brand.

Read more from BBN

Maardu manor house for sale with a starting price of 2 MEUR

Maardu manorThe Eesti Pank executive board has decided to put the Maardu manor estate up for sale at a starting price of two million euros. The real estate company Colliers International Advisors OÜ has been chosen as adviser and manager for the deal.

“Owning the Maardu manor property does not fit with the principles of an efficient organisation, as Eesti Pank only uses the property rarely. I am certain that a private company will be able to put the manor house to better use. We also used our buildings in Kuressaare only rarely, but the Arensburg Hotel has made a success of its operations there and has created extra jobs in Saaremaa”, said the Governor of Eesti Pank, Ardo Hansson.

Eesti Pank considered various ways of using Maardu manor more profitably. One option was to look for a long-term tenant, another was to rent the manor house out more often. In both these cases the owner would have needed to make major investments to turn Maardu manor into a fully-furbished centre for tourism or training events. However, Eesti Pank does not have the skills needed to develop the manor properly and doing so is not one of the core responsibilities of a central bank.

An earlier obstacle to the sale of Maardu manor was that it stood on unreformed state land and could not be sold. Eesti Pank started the process of registration for this in autumn 2013 and it was completed in January 2015.

The central bank discussed Maardu manor with the Ministry of Finance and the national property office, but it became clear that the state had no interest in buying the property.

Eesti Pank took tenders from four real estate companies to find an adviser for the sale of the manor property. The lowest bid came from Colliers International Advisors, who will receive a fee of 9950 euros for successfully completing the sale.

Eesti Pank bought the Maardu manor property in 1993 for 320,000 euros.

In autumn 2013 Eesti Pank sold a property with two buildings in Kuressaare for 550,000 euros to Arensburg OÜ, which runs the Arensburg Hotel near to the central bank property. After selling Maardu manor, the central bank will only own the buildings at Estonia puiestee in Tallinn.

Source: Bank of Estonia


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