Mobile Edition
Print
Get the Mag
Weekly Updates3. HOW DO WE FARE AND HOW DO WE APPEAR IN AN EU CONTEXT?
In the last decade the cost of housing has grown not only in Lithuania, but in many countries in the world, and at rates and for periods that have gone against many analysts' predictions. According to data from Lithuanian bank analysts, costs in the Eurozone have grown more than 30%, with increases of 50% noticed in the USA, and 115% in Great Britain. In more recent years similar real estate cost growth trends have been observed in the new EU member states as well. In 2005 they grew by 55% in Latvia, 40% in Lithuania, 28% in Estonia, 22% in Denmark, 18% in Spain, 17% in France, 14% in the UK, and so on Titarenko and Titova (2006).
Lithuania, where a thousand citizens have an average of two new apartments, is still considered to be quite far behind other EU states where the scale of construction is two to three times more rapid. Lithuania's neighbours are also ahead--with an average figure of 2.3 apartments recorded in Estonia, yet we are slightly ahead of Latvia, where this figure is 1.6. Lithuania should approach average EU levels in the next decade, but only if an additional 12,000-15,000 apartments are built every year. Generally speaking, going by the number of apartments (old and new) per thousand citizens, Lithuania is quite far behind both the older EU states and the newer states. Across the whole expanded EU there are an average of 431 apartments per thousand citizens, while this indicator reaches 462 apartments per thousand citizens in the older established EU states. In Lithuania this figure is 375 apartments per thousand citizens--quite far behind Latvia (417) and Estonia (460) (Titarenko and Titova, 2006).
Other Baltic countries are also ahead of Lithuania when considering the average area available per person. Estonians live most spaciously, with 28.2 [m.sup.2] per person, while Lithuanians and Latvians live in more cramped conditions, with 23.4 [m.sup.2] and 23.9 [m.sup.2] per person respectively. According to this indicator Estonia is closest to the EU average of 40 [m.sup.2] per person. Danes live most comfortably and most spaciously, with 52 [m.sup.2] per person, while people living in Luxembourg, Sweden and the Netherlands are not far behind (CEPI, 2004; CEPI, 2006).
Many of the people living in Lithuania's cities reside in high-rise apartment buildings, while in most EU states priority is given to individual houses which are still a luxury in Lithuania. The absolute majority of Lithuanians live in privately owned property, as opposed to rented (Lithuania is first among EU states in the number of people living in privately owned housing)--98% in Lithuania, 97% in Romania and Bulgaria, 85% in Estonia, and 83% in Latvia and Spain. Swiss citizens express the lowest rates of ownership, coming in at 43%, with 49% ownership in Sweden and the Czech Republic and 74% in the UK (CEPI, 2004; CEPI, 2006).
4. FACTORS INFLUENCING FLUCTUATION IN THE HOUSING MARKET IN LITHUANIA
Is housing affordable?
In recent years there has been more and more discussion on whether housing really is affordable to people earning an average wage? Affordability indicators are mentioned which allow us to evaluate the state of the real estate market. However, do Lithuania's citizens already earn enough to allow them to buy into newly constructed housing?
Average income amounts show how much people earn, however, in order to find out whether they can afford to buy into housing, the housing affordability index is applied in EU states. It is calculated by finding the ratio between the average cost per [m.sup.2] (an average apartment is set at 2 rooms, with a total area of 55 [m.sup.2]) and the average income in the capital.
Real estate costs are rising at a considerably greater rate that wages in Lithuania: in the summer of 2003 a one room apartment in a residential Vilnius suburb cost approx. 70,000 Lt (1 Euro = 3,45 Lt), while with the addition of a 25 year loan, the resulting monthly bank payments added up to an average of 380 Lt, or 45% of the net income (see Figure 1). In 2005 the cost of an equivalent apartment had already risen to 160,000 Lt, with monthly payments of 850 Lt, or around 80% of the average net income.
In the case of Lithuania, the application of the earlier mentioned indicator is limited by the relatively short history of housing costs. The Lithuanian housing market is not considered to be well-informed--here there is no official housing costs index, like the one that exists in many other countries. This is why it is not surprising that there is such disparity between market players' and even analysts' opinions on the economic reasoning behind housing costs. On the one hand this makes it more difficult to conduct a reliable economic analysis or present recommendations for the formation of economic policy. On the other, this places greater pressures on market players and creates the conditions for the often-mentioned 'price bubble', as there is no reliable data allowing the adoption of economic resolutions.
[FIGURE 1 OMITTED]
Statistical analysis of average wages and the cost of 1 [m.sup.2]
The hypothesis concerning the cointegration of these two attributes cannot be proven:
* For r=0 "Trace" test equal to 9.2512, critical value equal to 15.34;
* For r=1 "Trace" test equal to 2.9682, critical value equal to 3.84.
Granger causality has not been proven between these attributes:
* Cost of 1 [m.sup.2] -> Av. W--p-value is 0.1981;
* Av. W -> Cost of 1 [m.sup.2]--p-value is 0.4203.
5. GROSS DOMESTIC PRODUCT (GDP)
Realistic growth in GDP creates the conditions for growth in the real estate market, which is several times greater than the Eurozone indicator, as does growth in wages (see Figure 2).
Statistical analysis of cost per [m.sup.2] and GDP
The hypothesis concerning the cointegration of these attributes cannot be proven:
* For r=0 "Trace" test equal to 12.9026, critical value equal to 15.34;
* For r=1 "Trace" test equal to 0.3775, critical value equal to 3.84.
Granger causality between these attributes cannot be proven:
* Cost of 1 [m.sup.2] -> GDP--p-value is 0.4578;
* GDP -> Cost of 1 [m.sup.2]--p-value is 0.4851.
Examination of affordability and GDP
The hypothesis concerning the cointegration of these attributes cannot be proven:
* For r=0 "Trace" test equal to 8.8560, critical value equal to 15.34;
* For r=1 "Trace" test equal to 0.0054, critical value equal to 3.84.
Granger causality was found only in the form of GDP dependence on affordability:
* Affordability -> GDP--p-value is 0.0235;
* GDP -> Affordability--p-value is 0.7266.
[FIGURE 2 OMITTED]
GDP cointegration or Granger causality between other attributes under examination was not found.
6. LOANS
Compared with the rest of the Eurozone, Lithuania is characterised by particularly low interest rates, attractive loans conditions and the application of various tax exemptions (e.g. income tax exemptions) for those wanting to buy into residential property. The combination of a growth in disposable incomes for Lithuanian citizens and low interest rates have created better opportunities for more people to qualify for a home loan (see Figure 3).
All the same, compared to the EU average, the importance of home loans in Lithuania is still quite low. In other countries in Western Europe about 60-70% of all residential property is acquired by taking out a loan. The extent to which home loans are utilised in the Baltic countries is quite far behind that evident in other EU countries (30 times less than in Sweden, which has a similarly sized population to Lithuania, Latvia and Estonia, 72 times less than in the Netherlands, and as much as 280 times less than in Germany, which has the greatest loans market in Europe).
[FIGURE 3 OMITTED]
According to Lithuanian bankers, the loans market will continue to enjoy rapid growth, especially as home loan conditions in Lithuania are among the most favourable in Europe. In a list of 117 countries announced at the World Economic Forum, Lithuania was 5th in terms of loans accessibility. In addition, Lithuanian banks grant loans of for up to 40 years, while other countries set a 25-30 year limit. This means that Lithuanians who are determined to borrow from the banks need to make a smaller initial contribution, while others are granted 100% loans. However, it should not be forgotten that the lowest possible threshold for interest rates has already been reached, and they are now on the rise. The European Central Bank's increased base interest loan rate and talk in the market about Lithuanian banks imposing stricter measures before granting loans may influence changes in housing demand in the future.
Statistical analysis
There is no cointegration between affordability and various interest rates, nor is there any relation to Granger causality.
There is no cointegration nor Granger causality between the average cost of 1 [m.sup.2] and various interest rates.
7. THE NATIONAL STOCK EXCHANGE OF LITHUANIA
The level of activity of the National Stock Exchange of Lithuania has not been thoroughly examined as it has a short history, as various funds (superannuation, etc.) are only starting out, and people are new to the world of investment. Perhaps this is a field where economists could give more detailed explanations of this area of finance, if only to distance it from its perceived underhanded nature.
During Soviet rule a popular way for saving money was the so-called 'sock-stuffing' method. Due to the money reforms which took place, placing deposits in Soviet savings banks was not a popular option. These days the former concept of 'sock saving' has been replaced by the only seemingly legitimate successor--investment in real estate markets. This became especially evident after the first major increase in real estate prices. In other words, this change was most clearly illustrated by the privatisation process in Lithuania, when most attention was given to the acquisition of real estate, and not prospective business development.
FEED