Vasiliauskas: this is not the time to rejoice and think that it’s over

The Bank of Lithuania is hosting the eighth annual real estate conference on Tuesday, but for the first time it is being held remotely. Vitas Vasiliauskas, president of the Institution’s Council, joked that this time it was behaving “pro-cyclical”, because due to difficulties the premises were not rented and thus money was saved, but the representatives of the commercial real estate sector lost income.

V. Vasiliauskas estimated that the pandemic did not affect the Lithuanian real estate market as much: after last spring’s quarantine, the growth of house prices slowed down, the expectations of real estate market participants deteriorated significantly, most of banks began to expect property prices to fall, especially in commercial real estate.

“However, although there were predictions that the market would soon collapse and fundamentally change, it did not happen. On the contrary, recovering after the first shock, the housing market is back at highs. In autumn, home sales have already been exceeded the average of several years ”, explains V. Vasiliauskas and assures that several records in the real estate market are increasingly being mentioned with more force.

V. Vasiliauskas mentioned several reasons for this, but assured that he does not have clear answers about the good situation of the real estate market.

“First of all, there are positive demographic changes, especially in the capital. If last year we still had doubts whether the population growth will not be unique, then this year it is already obvious, the population is growing for the second year in a row, the trend will continue. This is a significant incentive for the growth of the housing market in particular, ”says V. Vasiliauskas.

He explained that fintech and other centers are expanding in Vilnius, which is increasing the number of high-income buyers and renters, and they need more quality housing; demand is not slowing down.

“Another reason is housing affordability, which remains at record highs. A simple example of a medium-sized apartment this year, the average family can buy for an average of three years of their salary. Last year, the same housing would have required 1.5 more months of work, 5 years ago for such a purchase, about 10 months ahead ”, compares V. Vasiliauskas.

Wages continue to grow faster than house prices and borrowing conditions remain favorable, with the contribution of the Eurosystem.

“When we work from home more, we need a separate workspace, so perhaps we will look for larger homes. And when it is not possible to entertain, travel and save money, investment in real estate can also be encouraged,” said the president of the Board of Directors of the Bank of Lithuania.

Promises little interest for a long time: rejoice too soon

V. Vasiliauskas underlines that according to the stimulus monetary policy package of the European Central Bank, mortgage holders can remain calm for now.

“This means that the interest will remain in the lowlands for a long time,” V. Vasiliauskas said at the conference.

He assesses that even in terms of prices, the situation in the housing market is still sustainable, housing is still affordable.

Responsible lending regulations limit irresponsible behavior, both by creditors and buyers, and prevent the formation of irrational expectations. This gives a real reason to believe that this time it will really be a little different ”, V. Vasiliauskas compared the situation with the crisis that existed more than a decade ago.

He assured that the growth of loans is better balanced with the general economic evolution and that less is bought with the loan than before the previous financial crisis.

“In the event of imbalances in the housing market, we will certainly not hesitate to implement the macroprudential policy mandate in our hands”, assured V. Vasiliauskas, explaining that if necessary, the regulations on responsible lending can be modified and they can modify the capital requirements of banks.

V. Vasiliauskas hinted that the Bank of Lithuania can also apply new instruments to restrict or promote housing loans in specific cities.

“It is definitely not the time to rejoice now and somehow think that everything is over. We are really living in the conditions of the second, and I don’t know if the last quarantine, so it is difficult to predict what the consequences will be for the economy and the real estate market ”, explained V. Vasiliauskas.

He explained that pandemics and economic constraints have a particularly strong impact on activities such as catering, accommodation and travel.

Therefore, the share of GDP generated in these activities is not significant. However, younger people, between the ages of 18 and 35, often work here. population. After all, it is young people who are the most active buyers and tenants of housing, ”explained V. Vasiliauskas.

Warns of potential difficulties in commercial real estate

However, in the commercial real estate sector, V. Vasiliauskas would see problems that will be long-term. He explains that companies have a broad picture of risks and the degree of uncertainty is not diminishing, it is not clear if the housing market will continue to be equally resilient.

“If a pandemic can weigh the balance in favor of the housing market, then the impact on the commercial real estate market could be the opposite. We anticipate that the proportion of vacant offices in Vilnius will increase significantly next year. This will undoubtedly be influenced by telework ”, says V. Vasiliauskas.

The quarantine also restricted normal commerce and led to its faster migration to cyberspace.

“The commercial real estate market is facing serious challenges and they are only getting worse. For her, the current challenges will mean a structural breakdown and will become a new norm in the post-pandemic world,” warned V. Vasiliauskas.

The situation of construction companies and property developers is not unequivocal either

“Yes, the indicators remain sustainable for the moment: inventory levels are higher and debt is lower than during the previous crisis. However, this sector is particularly sensitive to internal and external shocks, it is pro-cyclical,” he explained V. Vasiliauskas.

With the world economy experiencing the worst turmoil since World War II, Lithuania should expect slower economic development in the near future, and the construction sector is one of the first to feel that.

“To adequately adapt to the changing situation of the real estate market, which means being adequately prepared for possible changes: adequately assess the risks assumed and accumulate sufficient reserves”, says V. Vasiliauskas.

Garbaravičius sees growing competition between banks

Advisor to the Chairman of the Board of the Bank of Lithuania, Tomas Garbaravičius, observes the increasing competition between banks in the mortgage loan market

We see that at the end of 2018, the concentration of flows had increased even more, as it was said in Lithuania, there were two and a half banks in Lithuania. Later, both large and small banks joined, and competition intensified in the home loan market, “said T. Garbaravičius.

He estimates that house prices in Lithuania will continue to grow around 7 percent, in Vilnius – about 6 percent, a little slower than in the regions. That growth is similar to the growth of wages.

“As we’ve seen, the house price pandemic is unmatched. House prices may have slowed a bit during the first wave of the pandemic, but in fact there was no correction,” says T. Garbaravičius.

Similar trends: not only in Lithuania but also in other Nordic countries, a small correction was recorded in Latvia and Estonia.

“In Sweden, despite the exceptional situation due to the pandemic, house prices have even shot up quite strongly in recent months,” compared T. Garbaravičius.

The price increase is not unreasonable and reflects real values, according to the Advisor to the Chairman of the Board of the Bank of Lithuania.

“Various estimates of fundamentals or deviations show that prices are approximately reasonable and are neither too high nor too low,” says T. Garbaravičius.

There is no inertia, but expectations are more optimistic

T. Garbaravičius noted that when forecasting the impact in the future, the real impact of the pandemic will become apparent only later.

“In my head, we have not yet seen the real impact of the pandemic, as corporate bankruptcies are delayed. The company no longer has reserves and some of them may have to close,” said T. Garbaravičius.

Even though the market remains active, he said, the inertia here will be less than the initial contributions paid during the first quarantine, when the market was supported by previously concluded contracts.

“The stop can be faster than during the first wave,” says T. Garbaravičius.

Bank capital remains strong and reserves are sufficient for further loan expansion, but losses have also been incurred here.

“Actually, the banks have already incurred taxes, we may not see them yet. Part of the deferred loans will turn into bad loans,” said T. Garbaravičius.

Still, current expectations and the general assessment of the situation are more optimistic than before, T. Garbaravičius noted, noting that the Bank of Lithuania has prepared its arsenal of measures if the market needs help.