The rising cost of living, higher interest rates and the uncertain outlook for the economy have made people less willing and able to borrow to buy houses. Demand for housing first started falling in the third quarter of 2022 and the banks issued 22% fewer new housing loans with a mortgage in the first four months of this year than they did a year earlier. This meant the number of new loans was close to what it was in 2018-2019 before the pandemic. The volume of new housing loans has fallen more in relative terms in the first quarter than the total value of housing transactions, indicating that people are using their own funds more to pay for transactions.

The calmer rate of growth in the housing loan market is better from the perspective of the long-term development of the economy and the real estate market. There were extraordinary levels of activity in the housing and housing loan markets in recent years. Rapid growth in household incomes increased demand, as did savings accumulated during the pandemic, money withdrawn from the second pension pillar, and low interest rates. Demand exceeding supply pushed housing prices up fast and in 2022 overall they rose notably faster than incomes. This reduced the number of people who could afford to buy real estate and meant that larger loans were needed in order to buy property, making borrowers more vulnerable to a loss of income or of a job.

The interest margins on new housing loans have narrowed as Euribor has risen. The rapid rise in base interest rates has pushed the interest rates on housing loans up a long way in a short time. Housing loans were still being issued with an average interest rate of 1.9% a year ago, but by April this year the average interest rate was almost 5.1%. The capacity of the banks to lend remains strong though, and several banks are looking to keep growing fast. Falling demand means they are competing for a smaller number of clients than before, and so interest margins have been reduced. Several banks have launched discount packages in recent months that offer an interest rate on housing loans that is below the average for the early part of the loan.

If the outlook for the economy becomes clearer and interest rates stabilise, some recovery in demand for loans may be expected. The March forecast from Eesti Pank expects that the downturn will not lead to a dramatic rise in unemployment, and that wages will continue to rise fairly fast in the coming years. Jobs being maintained means there is no pressure to sell real estate, and so no sharp fall in real estate prices is expected. Real estate prices rising more slowly as wages continue to increase means that property will become more affordable. It is probable that demand for loans and loan growth will increase as the uncertainty around the economy dissipates and interest rates stabilise. Interest rates being at a higher level than before means though that loans will grow at a gentler pace than in earlier years. It should equally be noted that there is a lot of uncertainty around the economic forecast because of the war in Ukraine and geopolitical tensions.

Eesti Pank published the statistics for banks and leasing companies for April on its website today. The statistical release describes the main changes in the statistics on banks and leasing companies, covering the volume and structure of assets, loans and leases issued, deposits, and interest rates on loans and leases. The statistical release is independent of economic policy releases and is presented separately from them.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 56920 930
Press enquiries: [email protected]