estonian housing market : affordability problem and regulatory framework
DESCRIPTION
Estonian housing market : affordability problem and regulatory framework. Angelika Kallakmaa a [email protected] Ene Kolbre e [email protected]. - PowerPoint PPT PresentationTRANSCRIPT
Tallinn University of Technology
Estonian housing market: affordability problem and regulatory framework
Angelika [email protected]
Tallinn University of Technology
„Although the problem of declining affordability has been widely discussed in the media, the theoretical underpinnings of the concept of affordability have received rather less attention from academics“
(Gan, Hill, 2008)
Tallinn University of Technology
Housing market Estonia
Early in the 1990s the real estate market was relatively passive and the price levels were low
Upturn in housing market started with economic growth and with activating borrowing process for housing purposes after 1999
Tallinn University of Technology
Notarised Purchase-Sale contracts
0
5000
10000
15000
20000
25000
30000
35000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Num
ber
0
500
1000
1500
2000
2500
EUR
mln
Number of purchase-sale contracts of land w ith residential buildings
Number of purchase-sale contracts of ow nership of dw ellings
Value of contracts of land w ith residential buildings, EUR mln
Value of contracts of ow nership of dw ellings, EUR mln
Source: Statistics Estonia
Tallinn University of Technology
In the previous works
We estimated, that there was a bubble in the Estonian real estate market and
the total volume of housing loans has increased as a result of low interest rate and tight competition in the banking sector
(Kolbre, Kallakmaa 2006, 2007)
Tallinn University of Technology
Availability of financing is the critical factor for housing market
Historically the housing in many countries was financed by the local lenders
(Green, Wachter,2007)
Tallinn University of Technology
Housing loan market In Estonia
... is mostly shared by four credit institutions, which in all account for 93% of the total market.
The largest market share is held by Swedbank – 43% of the total consolidated loan
portfolio, followed by SEB Bank 23%, the Estonian branch of Nordea Bank 15% and the Estonian branch of Danske Bank 12 %
Tallinn University of Technology
Why?
Estonian government has made many decisions, that have influenced the real estate market,
but no research has been done on trying to get an answer about the affordability problem in the housing market in Estonia.
Also there are no analyses about the impact of regulatory framework to the housing market – are the government goals achieved or not?
Tallinn University of Technology
The purpose of this study:
how to evaluate affordability of housing in the Estonian market?
to asses the regulatory framework decisions impact to the housing market in Estonia
Tallinn University of Technology
The affordability of the average priced house Wildly used affordability models are normally
focused on the relationships between house prices and a same demand factors: price/income ratio or mortgage payments
purchase affordability
repayment affordability
Tallinn University of Technology
Traditionally used indicators to evaluate the affordability
HAI index (US National Association of Realtors) BIS Shrapnel index (BIS Shrapnel Australia) Household debt service ratio (DSR) Financial obligations ratio (FOR) The Median Multiple P/I, price-to-income ratio
Tallinn University of Technology
Repayment affordability
HAI construction for Estonian market
HAI = MR/ I
Where,
MR – average mortgage loan repayment for housing purposesI – average full time income
Tallinn University of Technology
The assumptions for modelling
we are using Estonian aggregated data PSV is average purchase–sale value of dwellings (value of
purchase-sale dwelling contracts/number of purchase-sale dwelling contracts), Statistics Estonia, authors calculation
average gross and net income, Statistics Estonia average mortgage loan (AML), authors calculation average mortgage loan repayment (MR), authors
calculation for reference value we take 30 % of net income and 24 %
of gross income average housing loan interest rate, Bank of Estonia personal income tax rate 21 %, Income Tax Act
Tallinn University of Technology
We supposed, that
AML = PSV x 2/3where,
AML – average mortgage loan;PSV- average purchase –sale value of dwellingsand MR = AML/ A
Tallinn University of Technology
HAI for Estonian housing market
Source: Statistics Estonia, Bank of Estonia, author’s calculation
Housing affordahility index (HAI)
0,00
0,10
0,20
0,30
0,40
0,50
0,60
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
HAI (gross income) Mortgage payment restriction (net income) HAI (net income)
Tallinn University of Technology
Purchase affordability
The P/I ratio
(ratio of a price per square metre to personal income ratio)
Tallinn University of Technology
P/I ratio for Tallinn housing market (2 room apartments)
(the ratio of a price per square metre to personal net income)
Source: Statistics Estonia, Bank of Estonia, author’s calculation
P/I
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
P/I (net, household) P/I (net, person)
Tallinn University of Technology
Regulatory framework
Government activities have also affected the real estate market.
The impact of regulatory framework is difficult to measure, but we can’t underestimate its influence to the housing loan decision making process and also to the housing market as a whole
Tallinn University of Technology
Government activity
The possibility of deducting housing loan interests from taxable income
A support system to eliminate market failures through the state foundation KredEx
From the year 2000, when KredEx started to issue housing loan guarantees, until 2010: there are 13,640 young families, 7,300 young specialists and 69 tenants of restituted houses have improved their housing conditions, which makes a total of more than 21,000 households (Kredex)
Tallinn University of Technology
We assume, that
L / V ≤ ⅔Taking into consideration that it is reasonable that the
proportion of the housing loan should not be more as 2/3 of dwellings market value and this restriction was until 2002 also in credit institutions
Where,
L- Housing loan turnover in year V - Value of housing purchase-sale transactions in year
Tallinn University of Technology
Regulatory framework
0,0%20,0%40,0%60,0%
80,0%100,0%120,0%
Housing loans/GDP
Housing loan proportion from value of purchase-sale contracts
Source: Statistics Estonia, Bank of Estonia, author’s calculation
Tallinn University of Technology
Discussion
Sharp rise in housing market started after the elimination of mortgage loan amount restriction, which caused also the worsening in affordability issues
The worst was affordability situation in 2005-2009
There are same risks that needed a regulatory intervention, one is the need of credit standard tightening
Tallinn University of Technology
The real estate bubble burst before the Lehmann crises and it gave the economy the time for recovering
Political decisions might have been made with a purpose to ensure a better access for households to the loan market, but at the same time not thinking on its impact on the real estate market
Conclusion
Tallinn University of Technology
Conclusion Housing affordability problem is very important
for all households and there is a need to continue with research in this field. Some households can not buy a house, some have loan repayment problems
Government activity had helped to make housing loans affordable for households, but it has amended only households purchase affordability. The high debt burden has weakened the households’ financial position and brings forth the loan repayment affordability problem
Tallinn University of Technology
Conclusion
Policymaking is more of a form of art, then science, but there is a need for long-term thinking
Tallinn University of Technology
Thank you!