Housing Affordability Index for Baltics - June 15, 2012: The housing affordability index (HAI) increased to 104.9 in Vilnius and 155.3 in Tallinn, but decreased to 136.8 in Riga

1. Housing Affordability Index for Baltics
Measures how well households can afford their purchases of apartments in the three Baltic capitals
15 June, 2012
The housing affordability index (HAI) increased to 104.9 in Vilnius
and 155.3 in Tallinn, but decreased to 136.8 in Riga
 During the first quarter of 2012, 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 from
101.8 in the fourth quarter last year to 104.9. Over the same period, the HAI in Tallinn in-
creased less, from 154.5 to 155.3, while in Riga it dropped from 145.7 to 136.8. This means
that in the first quarter households’ wages in Vilnius was 4.9% — and in Tallinn, 55.3%, and in
Riga, 36.8% — more than needed to afford an apartment, according to our norm of 30% of net
wages for mortgage costs.
 In Vilnius, the affordability increase was fuelled by a decrease in interest rates of 32 basis
points on a quarterly basis. This favourable change outweighed the seasonal fall in wages and
rise in housing prices, as both them were slight.
 In Tallinn, the HAI rose also because of a quarterly decrease in interest rates, which fell by 19
basis points. A higher increase in affordability was held back mostly by a 1.4% seasonal drop
in net wages. A 0.4% increase in housing prices also had a negative, but smaller, effect on af-
fordability.
 In Riga, the main reason for the significant quarterly decrease of housing affordability was the
considerable (4.8%) increase in apartment prices and 2.3% quarterly seasonal decrease in
net wages. A modest decrease in interest rates had a positive — albeit smallest among the
Baltic capitals — effect on affordability.
 The time needed to save for a down payment increased in all three cities: in Riga, from 24.9 to
26.8 months; in Tallinn, from 24.9 to 25.3 months; and in Vilnius, from 36.7 to 37 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 greater the affordability.
Housing affordability index
190
179.5
180
170
160
156.4 155.3 Tallinn Riga Vilnius
150
140 136.8 2005 109.3 66.5 69.6
130
120 2006 76.3 60.3 56.5
110 104.9
104.9 2007 67.2 53.4 51.0
100
90 2008 86.6 77.8 55.3
80 Tallinn 2009 161.5 140.5 86.4
70
60 Riga 2010 160.4 137.3 103.2
50 Vilnius
40
2011 154.2 145.1 102.8
2005 2006 2007 2008 2009 2010 2011 2012 2012 Q1 155.3 136.8 104.9
Sources: 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 and
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
From the fourth quarter of last year to the first quarter of 2012, the price of apartments in Riga grew by
4.8%; in Tallinn, by 0.4%; and in Vilnius, by 0.2%. On an annual basis, the price of an average-sized,
55 sq. m. apartment in Tallinn rose by 13.9%; in Riga, by 8.5%; and in Vilnius, by 5.7%.
In the first quarter of 2012, this standard apartment was the most expensive in Vilnius, where its price
reached EUR 61,862. This same apartment cost EUR 59,116 in Tallinn and EUR 42,843 in Riga.
In the first quarter, apartment prices in Riga were 50.6% of what they had been during the peak.
Prices in Vilnius and Tallinn were, respectively, 67.3% and 64.9% of their peak as the price correction
was smaller in Vilnius and prices in Tallinn recovered the fastest from the lowest point.
The slowest recovery of apartment prices among the Baltic countries – in Latvia – accelerated signifi-
cantly in the first quarter of this year, as the annual change in housing prices moved from a 2.6% fall in
the last quarter of 2011 to an 8.5% increase. This must have been influenced by higher demand
growth. However, apartment prices increased only in the Riga centre, not for the block houses. In any
event, it is still hard to say whether the rise in apartment prices in Riga will be sustained as a pickup in
activity in the first quarter may reverse in the following months.
The fastest, 13.9%, annual growth in housing prices — in Estonia — continues to be supported by the
lowest unemployment and interest rates, and the highest annual net wage growth. As a result, the
demand in the housing market has recovered the strongest among the capitals, also partially sup-
ported by higher foreign demand.
Apartment prices, EUR/m2
1,800
1,671 EUR
1,700
1,657 EUR
1,600 Tallinn
1,541 EUR
1,500 Riga
1,400 Vilnius
1,300
1,200
1,100 1,125 EUR
1,075 EUR
1,000
900
800 779 EUR
700
600
2005 2006 2007 2008 2009 2010 2011 2012
Sources: Lithuanian Centre of Registers, Latv ian State Land Serv ice and National Real Estate
Cadastre, Estonian Land Board and Swedbank
Interest rates on mortgages
Interest rates decreased on a quarterly basis in all three countries. In Lithuania, they declined by 32
basis points to 3.59%; in Estonia, by 19 basis points, to 3.49%; and in Latvia, by 6 basis points, to
4.08%. Three-month euro interbank offered rate (EURIBOR) has decreased from 1.44% in the last
quarter of 2011 to 1.04% in the first quarter this year. Significantly slower decrease in interest rates in
Latvia compared with Lithuania could be explained by somewhat increased margins in Latvia due to
grown funding costs. Nevertheless, as the number of new mortgage deals is still at low levels in all
countries, the interest rates volatility is quite high.
Interest rate differentials remain the main reason why apartments are more affordable in Tallinn than
in Riga. However, the ratio of wages to apartment prices worsened significantly in Riga in the first
quarter and became more unfavourable than in Tallinn. This ratio was similar in Riga and Tallinn in
2011 as the recovery in Riga’s housing prices was very weak. However, this situation changed in the
first quarter of this year.
2 Housing Affordability Index for Baltics • 15 June, 2012

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% Estonia
6.4%
5.5% Latv ia
Lithuania
5.0%
4.5%
4.0% 4.08%
3.59%
3.5% 3.49%
3.0%
2005 2006 2007 2008 2009 2010 2011 2012
Sources: National central banks and ECB
Average net wages
From the last quarter of 2011 to the first quarter of this year, the average net wages of households fell
the most in Riga, by 2.3%. Tallinn households experienced a 1.4% fall and wages in Vilnius decreased
by 0.6%. However, wages were decreasing due to seasonal factors and some lagged effects of nega-
tive business sentiment at the end of 2011, and these are likely to fade away in the following quarters.
In an annual comparison, wages rose in all three capitals – the increase was the highest in Tallinn,
where growth reached 6.4% and the average net household wage was EUR 1,167 in the first quarter.
In Vilnius, net wages increased by 3.8% to EUR 836, and, in Riga, by 3% to EUR 800.
In the first quarter of this year, the interest rate difference in Lithuania compared with Estonia was the
smallest since the end of 2008, and the difference in affordability between Tallinn and Vilnius became
even more dependent on the wage differences. In Tallinn, households earned 39.6% more than in Vil-
nius, while apartment prices in the Estonian capital were 4.4% lower. Housing in Riga is also consid-
erably more affordable than in Vilnius, as Vilnius households earn only 4.4% more than their counter-
parts in Riga but pay 44.4% more in apartment prices.
Average net wage, EUR
800
778 EUR
750
700
650
600
557 EUR
550
534 EUR
500
450
400 Tallinn
350 Riga
300 Vilnius
250
200
2005 2006 2007 2008 2009 2010 2011 2012
Sources: National statistical departments
The HAI value of 155.3 in Tallinn means that household net wages in this city is 55.3% higher than
required to afford an apartment, according to our norm (mortgage costs account for 30% of net wages
of a household that earns 1.5 of the average net wage). In Latvia, meanwhile, household net wages is
36.8% higher, and in Vilnius 4.9% higher than required to fulfil this norm. In the first quarter, mortgage
costs amounted to 19.3% of households’ net wages in Tallinn, 21.9% in Riga, and 28.6% in Vilnius.
Compared with the previous quarter, this is a decrease of 0.9 and 0.1 percentage points in Vilnius and
Tallinn, respectively, and an increase of 1.3 percentage points in Riga.
3 Housing Affordability Index for Baltics • 15 June, 2012

4. Net wages of households in Vilnius needs to be at least EUR 796 to meet the norm of affordability (de-
fined above). This required household net wages is EUR 752 in Tallinn, which is lower mostly due to
lower apartment prices. Meanwhile, households in Riga, which enjoy the lowest apartment prices,
have to earn only EUR 585 to afford an apartment – this is roughly one-forth less than in the other
capitals.
Compared with a year ago, the income margin when purchasing an apartment – or the HAI value –
decreased by 6 points in Tallinn and by 7 points in Riga. This is because in Tallinn net wages in-
creased more (6.4% vs. 3%) and interest rates fell more than in Riga (24 basis points vs. 2 basis
points), even though apartment prices increased faster in Tallinn (13.9% vs. 8.5%). Meanwhile, the
income margin in Vilnius widened by 2.6 points in a year. The fall in interest rates (35 basis points)
and increase in net wages (3.8%) contributed to this improvement, while the rise in apartment prices
of 5.7% restrained it.
Months to save for a down payment
In Vilnius, Tallinn, and Riga, the number of months needed to save for a down payment, which equals
15% of an apartment price, increased by 0.3 month to 37 months, 0.5 month to 25.3 months, and 1.8
months to 26.8 months, respectively, from the last quarter of 2011 to the first quarter this year. This
was due to increasing apartment prices and a seasonal decrease in net wages in all three capitals.
It is assumed that a 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 Tallinn
60
Vilnius
48.2 Riga
50
40
37.0
30
26.8
25.3
20
10
2005 2006 2007 2008 2009 2010 2011 2012
Sources: National statistical departments, Lithuanian Centre of Registers, Latv ian State Land
Serv ice and National Real Estate Cadastre, Estonian Land Board and Swedbank
Sensitivity analysis
Sensitivity analysis shows that, if apartment prices were to rise by 10%, the affordability margin would
disappear in Vilnius and households’ net wages would be too low, by 4.6%, to afford an apartment. An
increase in apartment prices of 10% would cause the margin to decrease by 12.4 points in Riga and
by 14.1 points in Tallinn, but the HAI would remain above 100 – at 124.4 and 141.2 in the respective
capitals.
The margins would disappear in each of three Baltic capitals if apartment prices were to increase by
more than 4.9% in Vilnius, 36.8% in Riga, and 55.3% in Tallinn – i.e., by the amount of the current
margins. Households would no longer be able to afford apartments if interest rates were to increase by
more than 0.39 percentage point in Vilnius, by more than 2.83 percentage points in Riga, and by more
than 3.97 percentage points in Tallinn, if other variables remained unchanged.
4 Housing Affordability Index for Baltics • 15 June, 2012

5. Housing affordability index: method
Purpose Measure changes in household buying power, primarily as this relates to
apartment purchases but also an indicator for 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. The 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, equal to 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 com-
ponent and a component of other charges) for new housing loans to
households issued in euros for Latvia and Estonia and weighted against
different 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. It reflects house-
hold buying power, based on apartment purchases that have been made,
but says nothing about opportunities for apartment sales.
The housing affordability index is of an informative nature and reflects mac-
roeconomic developments, rather than banks' decisions and lending poli-
cies or possible decisions made by individual households.
Periodicity Quarterly
Geography Vilnius, Riga, Tallinn
5 Housing Affordability Index for Baltics • 15 June, 2012

6. Appendix 1
Housing affordability Months to save for the
index down payment
Tallinn Riga Vilnius Tallinn Riga Vilnius
2005 Q1 113.7 64.4 72.6 32.7 50.0 46.7
2005 Q2 118.4 66.7 69.8 32.7 53.1 53.1
2005 Q3 105.2 66.4 75.2 37.4 53.5 50.9
2005 Q4 100.1 68.3 60.5 38.6 52.5 58.9
2006 Q1 84.2 60.0 58.6 44.0 57.6 62.8
2006 Q2 81.2 63.4 55.8 44.0 53.5 63.5
2006 Q3 70.4 57.9 58.6 48.2 56.3 58.3
2006 Q4 69.5 60.0 53.1 46.9 52.0 62.1
2007 Q1 65.5 53.0 54.4 47.8 57.4 59.1
2007 Q2 67.4 52.0 51.1 45.3 56.7 59.6
2007 Q3 62.6 47.5 50.0 46.9 60.3 59.1
2007 Q4 73.2 61.1 48.5 39.5 46.0 59.9
2008 Q1 80.5 70.5 54.1 37.3 40.7 55.3
2008 Q2 87.1 75.4 53.5 34.0 36.4 54.4
2008 Q3 83.3 80.0 54.4 33.5 31.9 51.7
2008 Q4 95.4 85.3 59.0 29.8 28.8 48.4
2009 Q1 129.6 116.8 68.8 25.6 25.1 44.1
2009 Q2 160.0 148.3 87.7 22.3 22.0 38.1
2009 Q3 179.5 140.7 93.9 20.6 25.1 36.3
2009 Q4 176.9 156.4 95.5 21.3 22.8 35.6
2010 Q1 160.5 138.5 100.6 23.1 26.3 35.3
2010 Q2 162.9 137.2 102.6 23.1 26.4 35.8
2010 Q3 157.3 134.8 104.9 23.9 27.2 34.9
2010 Q4 160.9 138.6 104.6 23.8 26.7 35.4
2011 Q1 161.3 143.8 102.4 23.7 25.4 36.4
2011 Q2 156.9 146.6 103.8 24.4 25.0 36.1
2011 Q3 144.0 144.3 103.4 26.4 25.1 36.1
2011 Q4 154.5 145.7 101.8 24.9 24.9 36.7
2012 Q1 155.3 136.8 104.9 25.3 26.8 37.0
High 179.5 156.4 104.9 48.2 60.3 63.5
Low 62.6 47.5 48.5 20.6 22.0 34.9
Average 117.8 98.6 76.0 32.7 38.5 47.6
Sources: National central banks, National statistical departments,
Lithuanian Centre of Registers, Latvian State Land Service and
National Real Estate Cadastre, Estonian Land Board, and Swedbank
6 Housing Affordability Index for Baltics • 15 June, 2012

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, Estonia
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 • 15 June, 2012

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8 Housing Affordability Index for Baltics • 15 June, 2012