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Strong business investment and domestic consumption contributed the most to these results in Lithuania. The industrial sector was also strong.
The good economic indicators at the beginning of the year allow to increase the forecast of the gross domestic product (GDP) – 5.1% is expected this year. increase. However, vigilance is needed due to mounting budget deficits and public debt, the continued risk of corporate bankruptcies, and an active residential real estate market.
2022 estimated at 4.1 percent. growth (previous forecast: 5.1%).
“There is no crisis in Lithuania that is not good,” joked Gediminas Šimkus, chairman of the board of the Bank of Lithuania.
Inflation has risen since the beginning of this year. According to G.Šimkus, it grew due to the recovery of the economy and also returned to the pre-pandemic level. Inflation stood at 3.5 percent in May. Among other factors, fuel prices have a strong impact on this: they are a quarter higher than in May a year ago: fuel prices in May this year were similar to those of 2019.
However, the rise in inflation is expected to be temporary and moderate this year. In Lithuania, 2.2 percent is expected this year and in 2022. – 2.1 percent. inflation. Wages should continue to grow faster than prices. Salaries are forecast to increase this year by an average of 7%, next year – by 5.9%.
According to G.Šimkus, the Lithuanian financial system has not suffered significant losses due to the pandemic so far, and the results of the stress tests of the banks show that they have sufficient capital shielding and could withstand even a hypothetical 6.8 percent. significant. economic downturn.
In the NT situation – through a magnifying glass
The main risks for the financial system are the deterioration of the financial situation of the companies affected by the restrictions and the related consequences for the economy, as well as the risk of overheating in the historically high-activity residential real estate market (RE).
“However, the pandemic is not over yet, there is still a lot of uncertainty, the number of corporate bankruptcies is possible in the future,” noted the governor of the Bank of Lithuania.
In the residential real estate market, the effect of pent-up demand during the pandemic was evident: a significant increase in demand raised house prices and increased the risk of a possible housing market overheating. Home prices rose 12 percent in the first quarter of this year. In recent years, the growth in prices for new-build apartments in the central part of Vilnius has been more prominent.
According to economists at the Bank of Lithuania, house prices are still in line with fundamental indicators, which also improved during the pandemic: wages, savings and the population in large cities grew rapidly. However, a cocktail of prolonged high activity in the housing market and overly optimistic expectations could lead to unsustainable price rises and overheating of the housing market. Therefore, we are closely monitoring this market and are ready to react when we see that it is necessary, ”said G.Škus.
He pointed out that the risk for the real estate market is not overlending, but the effect of the so-called compressed demand spiral, which became evident during the pandemic. The proportion of homes purchased with a loan is stable and the requirements of the Responsible Lending Regulations reliably protect against excessive borrowing.
The highest temperatures are felt in the primary market, that is, new homes sold by developers. Many new apartments are reserved in Vilnius. However, in May there is a certain decrease in market activity.
The Bank of Lithuania points out that the gap between supply and demand has formed in the primary market, remembered after the previous real estate crisis, speculation in reserves has already been forgotten, when the objective is not to buy a reserved house but resell the reservation contract. at a higher price. The lack of official real-time data on reserves does not allow an objective assessment of trends in this market, so the Bank of Lithuania has submitted a proposal for the mandatory registration of such agreements.
A contract register would increase the transparency of this market, help determine the preliminary number of sales, the number of transactions from drawings, and identify speculative reserves. The real estate tax review could also increase the sustainability of the real estate market.
“Currently, it is possible to register sales contracts in the Registry Center, but this is not an obligation, but an option that is not used because there is no requirement.
For this to become an obligation, and we believe it should be, it is necessary to amend the Civil Code. We appeal to the Ministry of Justice to initiate the consideration of such amendments, and it can be expected that such a proposal will reach the Seimas.
We believe that this measure is important not only because we will have more data and we will be able to analyze the market: when there is no data on initial reservations, there are many languages. And the excitement that is being created can also be a marketing tool, people are starting to rush to buy a house regardless of the price, ”explained the Governor of the Bank of Lithuania.
Buy a fifth to invest
“Resident interest in buying a house is historically high, and about a fifth of all houses are bought as an investment,” said G. Šimkus.
However, G.Šimkus cautions: so far, the Bank of Lithuania does not see an overvaluation of house prices, but if extremely high activity persists for a longer period of time, prices would deviate from real values, which could overheat the housing market. .
In addition, rising inflation can create unfounded expectations and encourage higher indebtedness.
