Housing Affordability Index for Baltics - December 14, 2011: The housing affordability index increased in Riga and Vilnius, but decreased in Tallinn

1. Housing Affordability Index for Baltics
Measures how well households can afford their purchases of apartments in the three Baltic capitals
14 December, 2011
The housing affordability index (HAI) increased to 141.1 in Riga and
105.2 in Vilnius, but decreased to 144.2 in Tallinn
 During the third quarter of this year, housing affordability strengthened the most in Vilnius: the
housing affordability index (HAI) – which is calculated for a family whose income is equal to
1.5 of average net wages with an average-sized apartment of 55 sq. m. – increased to 105.2
from 103.8 in the second quarter. The HAI in Riga increased less, from 140.7 to 141.1, while
in Tallinn it dropped to 144.2 from the second quarter’s 156.9. This means that in the third
quarter households’ income from wages in Vilnius was 5.2%--and in Riga 41.1% and in Tallinn
44.2%--higher than needed to afford an apartment, according to our norm of 30% of net
wages for mortgage costs.
 Although the main reason for the significant decrease of housing affordability in Tallinn was
the sharp increase in apartment prices, seasonal wage fluctuations and somewhat higher in-
terest rates and other related charges on new mortgages had an impact as well. Apartment
prices in the third quarter increased by 3.4% from the second quarter, while interest rates and
other related charges on mortgages were up slightly from 3.72% to 3.77%.
 In Vilnius, the affordability increase was fuelled by a 1.9% drop in apartment prices on a quar-
terly basis. The positive impact was diminished slightly by a rise in interest rates and other re-
lated charges on mortgages of 4 basis points and 0.1% lower wages, compared with the sec-
ond quarter.
 In Riga, the HAI rose over the same period despite an increase in interest rates and other re-
lated charges on mortgages; this increase was offset by lower apartment prices and higher
wages.
 The time needed to save for a down payment decreased marginally in Riga and Vilnius, to
25.7 and 35.4 months respectively, but increased in Tallinn by 2 months to 26.4 months.
 The HAI is 100 when households use 30% of their net wages for mortgage costs. When the
HAI is at least 100, households can afford their housing, according to the established norm.
The higher the number, the higher the affordability.
Housing affordability index
190
179.5
180
170 Vilnius Riga Tallinn
160
150 156.4 2005 69.6 66.5 109.3
144.2
140 141.1 2006 56.5 60.3 76.3
130
120 2007 51.0 53.4 67.2
110
105.2 2008 55.3 77.8 86.6
100
90 2009 86.4 140.5 161.5
80 Vilnius
70
2010 103.2 137.3 160.4
Riga
60 2011 Q1 102.4 136.0 161.3
50 Tallinn
2011 Q2 103.8 140.7 156.9
40
2005 2006 2007 2008 2009 2010 2011 2011 Q3 105.2 141.1 144.2
Source: National central banks, ECB, National statistical departments, Lithuanian Centre of
Registers, Latv ian State Land Serv ice and National Real Estate Cadastre, Estonian Land Board,
Swedbank
Economic Research Department.
Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720
Dainis Stikuts +371 67 445 844; Vaiva Šečkutė +370 2 582156; Annika Paabut +372 888 5440

2. Components of the HAI: apartment prices, interest rates, and wages
Apartment prices
In the third quarter of this year, the price of apartments increased in Tallinn by 3.4%, but decreased in
Vilnius and Riga by 1.9% and 0.9%, respectively, compared with the previous quarter. Nevertheless,
on an annual basis, apartment prices fell only in Riga – the price of a standard apartment was 1.6%
lower in Riga, but 4.1% higher in Vilnius and 18% higher in Tallinn.
In the third quarter, the average-sized apartment of 55 sq. m. apartment was the most expensive in
Tallinn, where its price reached EUR 58,751 and became higher than in Vilnius for the first time in four
years. A standard apartment cost EUR 57,889 in Vilnius and EUR 41,333 in Riga.
The main reason for the rising prices of apartments on an annual basis is the economic recovery,
which has been the strongest in Estonia, as well as the lower interest rates, which have made hous-
ing more affordable and thus pushed up prices. Falling unemployment and less uncertainty about fu-
ture income could also have influenced buyers’ activity, although the number of transactions remains
well below the level of the boom years.
In Estonia - where price growth has been substantially higher - an extra boost to rising prices, in our
opinion, has come from the strongly improved confidence. This, in part, is connected to the change-
over to the euro, which has eliminated currency risk in the economy, possibly made borrowers more
optimistic, and made the country more attractive to foreign investors.
Apartment prices, EUR/m2
70
63.5
60.3
60
50 48.2
Vilnius
Riga
40
35.4 Tallinn
30
26.4
25.7
20
10
2005 2006 2007 2008 2009 2010 2011
Source: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice
and National Real Estate Cadastre, Estonian Land Board, Swedbank
Interest rates on mortgages
Interest rates and other related charges for new mortgages (annual percentage rate of charge) in-
creased in the third quarter of this year the most in Latvia (from 4.07% in the second quarter to
4.16%). In Estonia, these rates climbed by 6 basis points to 3.77% and in Lithuania by 4 points to
3.93%. This growth in the annual percentage rate of charge for mortgages is most likely related to the
increase in the ECB's policy rate in mid-July (from 1.25% to 1.5%) and also to the higher risk premium
due to the greater risk aversion in financial markets – as a result, the three-month euro interbank of-
fered rate (EURIBOR) increased from 1.36% in the second quarter of 2011 to 1.51% in the third quar-
ter.
The affordability improvement in Riga was dampened because that city experienced the fastest in-
crease in interest rates and other related charges. The index would have been by 3.8 points higher
than in Tallinn if Latvia had enjoyed the same rates as Estonia because the difference between
apartment prices and wages was more favourable in Riga than in Tallinn.
2 Housing Affordability Index for Baltics • December, 2011

3. Annual percentage rate of charge for new mortgages to households
8.0%
7.8%
7.5%
7.0%
6.5%
6.5%
6.0% Lithuania
6.4%
5.5% Estonia
Latv ia
5.0%
4.5%
4.16%
4.0% 3.93%
3.77%
3.5%
3.0%
2005 2006 2007 2008 2009 2010 2011
Source: National central banks, ECB
Average net wages
The average net wages of a households grew slightly only in Riga, by 0.5%, from the second quarter
of 2011 to the third. Meanwhile, households in Tallinn faced a 4.3% decrease in their income from
wages, but this was due only to seasonal factors. Vilnius households experienced a smaller decrease
of 0.1%. On a yearly basis, average net household wages in Tallinn increased the most, reaching
EUR 1,115, 6.9% more than in the third quarter of 2010. In Riga, these wages increased by 4.1% to
EUR 804.6, and in Vilnius by 2.4% to EUR 816.7.
The higher housing affordability in Tallinn compared with Vilnius is mostly determined by the differ-
ence in wages. In Tallinn, households earn 36.5% more than in Vilnius, while apartment prices are
nearly on the same level.
Average net wage, EUR
800
750 743 EUR
700
650
600
550 544 EUR
536 EUR
500
450
400 Riga
350 Vilnius
300 Tallinn
250
200
2005 2006 2007 2008 2009 2010 2011
Source: National statistical departments
The HAI value of 144.2 in Tallinn means that households’ income from wages in this city is 44.2%
higher than required to afford an apartment, according to our norm (mortgage costs account for 30%
of net wages of a household, which earns 1.5 of the average net wage). In Latvia, meanwhile, house-
holds’ income from wages is 41.1% higher, and in Vilnius 5.2% higher than required to fulfil this norm.
In the third quarter, mortgage costs amounted to 20.8% of households’ net wages in Tallinn, 21.3% in
Riga, and 28.5% in Vilnius.
Net income from wages of households in Vilnius needs to be at least EUR 776.7 to meet the norm of
affordability (defined in paragraph above). This required income is lower in Tallinn (EUR 773.1), as
slightly higher apartment prices are compensated for by a lower annual percentage rate of charge for
mortgages. Meanwhile, households in Riga, which enjoy the lowest apartment prices, have to earn
only EUR 570.2 to afford an apartment. However, at the moment, households in Vilnius enjoy wages
that are similar to Riga’s and much lower than in Tallinn.
3 Housing Affordability Index for Baltics • December, 2011

4. Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –
increased by 6.3 points in Riga and 0.3 point in Vilnius. This is because apartment prices increased
faster in Vilnius (4.1% growth vs. 1.6% decrease) and wages increased less (2.4% vs. 4.1%) even
though interest rates and other related charges for mortgages fell more in Vilnius than in Riga (16 ba-
sis points vs. 9 basis points). Meanwhile, the income margin in Tallinn narrowed by 13.2 points in a
year. This was caused by a rise in apartment prices so rapid (18%) that it could not be offset even
by a 6.9% increase in net wages, or by a drop in interest rates of 9 basis points. This is an opposite
trend from that in Riga, where average net wages increased while apartment prices shrank.
Months to save for a down payment
In Vilnius and Riga, the number of months needed to save for a down payment, which equals 15% of
an apartment price, fell by less than a month to 35.4 and 25.7, respectively, from the second quarter
to the third quarter. However, this number increased by 2 months to 26.4 in Tallinn because of a si-
multaneous rise in apartment prices and fall in wages on a quarterly basis. Nevertheless, it still takes 9
months less to save for a down payment in Tallinn than in Vilnius.
It is assumed that household saves 30% of its net wages every month for a down payment.
Months to save for a down payment
70
63.5
60.3
60
50 48.2
Vilnius
Riga
40
35.4 Tallinn
30
26.4
25.7
20
10
2005 2006 2007 2008 2009 2010 2011
Source: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land Serv ice
and National Real Estate Cadastre, Estonian Land Board, Swedbank
Sensitivity analysis
Sensitivity analysis shows that, if interest rates were to rise by 2 percentage points, the affordability
margin would disappear in Vilnius and households’ income would be too low, by 16.3%, to afford an
apartment. An increase in interest rates of 2 percentage points would cause the margin to decrease by
28.8 percentage points in Riga and by 29.7 percentage points in Tallinn, but the HAI would remain
above 100 – at 112.6 and 114.4 in the respective capitals.
The margins would disappear in all three Baltic capitals if apartment prices were to increase by 5.2%
in Vilnius, 41.1% in Riga, and 44.2% in Tallinn—i.e., by the amount of the current margins. House-
holds would no longer be able to afford apartments if interest rates were to increase by more than 0.42
percentage points in Vilnius, by more than 3.16 percentage points in Riga, and by more than 3.29 per-
centage points in Tallinn.
4 Housing Affordability Index for Baltics • December, 2011

5. Housing affordability index: method
Purpose Measure changes in household buying power primarily as relates to apart-
ment purchases, but can also provide indications on existing housing.
Norm Household mortgage costs according to our definition should not exceed
30% of net wages of a household.
Definition of housing
affordability index Actual income in relation to income required to meet the “norm,” where
mortgage costs account for 30% of net wages of a household. If the index
= 100, households are using 30% of their net wages. If the index > 100,
household buying power exceeds the norm. And if the index < 100, house-
hold buying power is below the norm. Index is calculated according to the
following formula:
AverageINC
HAI  *100
NINC
where
PMT
NINC  .
30%
HAI - housing affordability index
AverageINC – 1.5 of average monthly net wages
NINC - net wages that would satisfy the “norm”
PMT - monthly mortgage payment
Variables  Three-month average prices of apartments of average size (55 sq. m.)
in capitals
 Average net wages of a household, which equal 1.5 of average monthly
net wages in capital cities
 Three-month average interest rates and other related charges (or an-
nual percentage rate of charge - a rate that comprises an interest compo-
nent and a component of other charges) for new housing loans to house-
holds issued in euros for Latvia and Estonia and weighted against dif-
ferent currencies (the litas and the euro) in Lithuania-- produce the
monthly mortgage cost, assuming a 15% down payment and 30-year
term
Limits The housing affordability index includes mortgage costs but excludes taxes
and subsidies, including property tax and interest deductions. The index
provides an indication of the situation for households composed of one or
two working people, which, combined, earn one-and-a-half times the aver-
age monthly wage; however, it does not reflect conditions for individual
households. The index does not provide any direct guidance for business
decisions, including lending and interest rate decisions. The index reflects
household buying power based on apartment purchases that have been
made, but says nothing about opportunities for apartment sales.
The housing affordability index is of informative nature and reflects macro-
economic developments rather than banks' decisions and lending policies
or possible decisions made by individual households.
Periodicity Quarterly
Geography Vilnius, Riga, Tallinn
5 Housing Affordability Index for Baltics • December, 2011

6. Appendix 1
Housing affordability Months to save for a
index down payment
Vilnius Riga Tallinn Vilnius Riga Tallinn
2005 Q1 72.6 64.4 113.7 46.7 50.0 32.7
2005 Q2 69.8 66.7 118.4 53.1 53.1 32.7
2005 Q3 75.2 66.4 105.2 50.9 53.5 37.4
2005 Q4 60.5 68.3 100.1 58.9 52.5 38.6
2006 Q1 58.6 60.0 84.2 62.8 57.6 44.0
2006 Q2 55.8 63.4 81.2 63.5 53.5 44.0
2006 Q3 58.6 57.9 70.4 58.3 56.3 48.2
2006 Q4 53.1 60.0 69.5 62.1 52.0 46.9
2007 Q1 54.4 53.0 65.5 59.1 57.4 47.8
2007 Q2 51.1 52.0 67.4 59.6 56.7 45.3
2007 Q3 50.0 47.5 62.6 59.1 60.3 46.9
2007 Q4 48.5 61.1 73.2 59.9 46.0 39.5
2008 Q1 54.1 70.5 80.5 55.3 40.7 37.3
2008 Q2 53.5 75.4 87.1 54.4 36.4 34.0
2008 Q3 54.4 80.0 83.3 51.7 31.9 33.5
2008 Q4 59.0 85.3 95.4 48.4 28.8 29.8
2009 Q1 68.8 116.8 129.6 44.1 25.1 25.6
2009 Q2 87.7 148.3 160.0 38.1 22.0 22.3
2009 Q3 93.9 140.7 179.5 36.3 25.1 20.6
2009 Q4 95.5 156.4 176.9 35.6 22.8 21.3
2010 Q1 100.6 138.5 160.5 35.3 26.3 23.1
2010 Q2 102.6 137.2 162.9 35.8 26.4 23.1
2010 Q3 104.9 134.8 157.3 34.9 27.2 23.9
2010 Q4 104.6 138.6 160.9 35.4 26.7 23.8
2011 Q1 102.4 136.0 161.3 36.4 26.9 23.7
2011 Q2 103.8 140.7 156.9 36.1 26.1 24.4
2011 Q3 105.2 141.1 144.2 35.4 25.7 26.4
High 105.2 156.4 179.5 63.5 60.3 48.2
Low 48.5 47.5 62.6 34.9 22.0 20.6
Average 74.0 94.9 115.1 48.4 39.5 33.2
Sources: National central banks, National statistical departments,
Lithuanian Centre of Registers, Latvian State Land Service and
National Real Estate Cadastre, Estonian Land Board, Swedbank
6 Housing Affordability Index for Baltics • December, 2011

7. Economic Research Department
Sweden
Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se
Group Chief Economist
Chief Economist, Sweden
Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se
Senior Economist
Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se
Senior Economist
Anna Ibegbulem +46 8 5859 7740 anna.ibegbulem@swedbank.se
Assistant
Estonia
Annika Paabut +372 888 5440 annika.paabut@swedbank.ee
Chief Economist
Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee
Senior Economist
Latvia
Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv
Deputy Group Chief Economist
Chief Economist, Latvia
Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv
Senior Economist
Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv
Senior Economist
Lithuania
Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt
Chief Economist, Lithuania
Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt
Senior Economist
Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt
Senior Economist
7 Housing Affordability Index for Baltics • December, 2011

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8 Housing Affordability Index for Baltics • December, 2011