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

The construction price index fell in Q1

The construction price index fell in the 1st quarter – Statistics Estonia

According to Statistics Estonia, the construction price index fell 0.7% at constant prices in the first quarter of 2016 compared to both the 4th and the 1st quarter of 2015.

In the 1st quarter of 2016 compared to the 4th quarter of 2015, the index was mainly influenced by the 1.2% decrease in the cost of building materials. Labour force costs increased 0.1% and the costs of building machines rose 0.2%.

In the 1st quarter of 2016 compared to the same quarter of the previous year, the construction price index was most influenced by the 2.0% decrease in the price of building materials. Labour force costs increased 1.9% and the costs of building machines decreased 1.6%.

The repair and reconstruction work price index fell by 0.5% in the 1st quarter of 2016 compared to the 4th quarter of 2015 and by 0.9% compared to the 1st 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, 1st quarter 2016
4th quarter 2015 –
1st quarter 2016, %
1st quarter 2015 –
1st quarter 2016, %
TOTAL -0.7 -0.7
labour force 0.1 1.9
building machines 0.2 -1.6
building materials -1.2 -2.0
Index of detached houses -0.3 -0.1
Index of blocks of flats -0.8 -1.0
Index of industrial buildings -0.3 -0.7
Index of office buildings -0.9 -0.7
Change in the repair and reconstruction work price index, 1st quarter 2016
4th quarter 2015 –
1st quarter 2016, %
1st quarter 2015 –
1st quarter 2016, %
TOTAL -0.5 -0.9
labour force 0.0 1.1
building machines -0.8 -3.9
building materials -0.8 -2.0

Source: Statistics Estonia

The price of Maardu manor was lowered to 1.49 million euros

The Executive Board of Eesti Pank decided to lower the price of the Maardu manor property, which was put up for sale a year ago, from 2 million euros to 1.49 million euros.

“There was interest in buying the manor, but it seems that 2 million euros was not the right price. We are still interested in selling Maardu manor, as we use it only rarely. Owning the Maardu manor property does not fit with the principles of an efficient organisation,” said Eesti Pank Governor Ardo Hansson.

Eesti Pank first put Maardu manor up for sale in February 2015. An earlier obstacle to the sale of Maardu manor was that it was surrounded by unreformed state land that could not be sold. Eesti Pank started the process of registration 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 purchased the Maardu manor property in 1993 and renovated it thoroughly over the years.

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 former central bank property. The private owner managed to make the property operate successfully and brought new jobs to Saaremaa.

After selling Maardu manor, the central bank will only own the buildings at Estonia puiestee in Tallinn.

Eesti Pank took tenders from four real estate companies to act as advisers for the sale of the manor property, and chose the real estate company Colliers International Advisors.

Source: Bank of Estonia

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The prices of apartments increased by 7.2 pct in a year

According to Statistics Estonia, the Dwelling Price Index increased by 6.9% in 2015 compared to the average of 2014. In the annual comparison, the prices of apartments increased by 7.2% and the prices of houses by 6.3%.

The annual change of the Dwelling Price Index was 8.5% in 2011, 7.3% in 2012, 10.7% in 2013 and 13.7% in 2014.

In the 4th quarter of 2015 compared to the 3rd quarter, the Dwelling Price Index increased by 0.8% and compared to the 4th quarter of 2014 by 5.1%.

In the 4th quarter of 2015 compared to the previous quarter, the prices of apartments increased by 1.1% and the prices of houses increased by 0.1%. The prices of apartments increased in all three areas under observation: by 1.2% in Tallinn and by 1.1% both in areas bordering Tallinn and in Tartu and Pärnu cities and in the rest of Estonia.

Compared to the 4th quarter of 2014, the prices of apartments have increased by 7.1% and the prices of houses by 0.6%. The prices of apartments increased in all three areas under observation: by 6% in Tallinn, by 12.1% in areas bordering Tallinn and in Tartu and Pärnu cities and by 3.1% in the rest of Estonia.

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).

Diagram: Dwelling Price Index, change over previous year, 2006–2015

The Owner-Occupied Housing Price Index increased by 6.9% in 2015 compared to the average of 2014.

In the 4th quarter of 2015, the Owner-Occupied Housing Price Index changed by -0.4% compared to the 3rd quarter and by 2.9% compared to the 4th quarter of 2014.

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. The annual index is calculated as the average of four quarters.

Source: Statistics Estonia

Construction volumes decreased in 2015

According to the preliminary data of Statistics Estonia, in 2015 the total production of Estonian construction enterprises in Estonia and in foreign countries amounted to 2.0 billion euros, which is 5% less than in 2014. The construction volumes have decreased for two years in a row.

The production value of building construction was 1.3 billion euros and the production of civil engineering works totalled 732 million euros. Compared to 2014, the volume of building construction decreased 2% 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. There was also decrease in repair and reconstruction work in building construction. At the same time new building construction, which had taken an upturn already in 2013, continued its growth trend in 2015 as well.

The construction volume of Estonian construction enterprises in foreign countries increased about a third compared to 2014, influenced mainly by the construction of buildings. Construction volumes in foreign countries accounted for 11% of the total volume of construction in 2015.

The number of dwelling completions increased for the fourth year in succession. According to the data of the Register of Construction Works, in 2015, the number of dwelling completions was 3,969, i.e. 1,213 dwellings more than the year before. 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 2015, building permits were granted for the construction of 5,588 dwellings, which is about a half more than in 2014. The most popular type of building was a block of flats.

In 2015, the number of completed non-residential buildings was 1,071 with a useful floor area of 626,700 square metres – this was primarily made up of new storage, industrial and office premises. Compared to 2014, the useful floor area as well as the cubic capacity of completed non-residential buildings increased.

In the 4th quarter of 2015, the production value of construction amounted to 558 million euros, which was 7% less than in the 4th quarter of 2014. The volumes of building construction as well as civil engineering decreased.Diagram: Construction volume index, 2000–2015

Source: Statistics Estonia

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

 

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