People are taking a wait-and-see attitude when taking out housing loans
Economist at Eesti Pank
The housing loan market has been very active in the past couple of years, but by December the uncertain economic climate and the general rise in prices and interest rates had made people cautious about taking new housing loans. Demand for housing loans is likely to improve from here on though with support from rising wages.
The housing loan market was very active in the past couple of years. Demand in the housing market started to increase from the second half of 2020 and was supported by rapid growth in household incomes and the savings they built up. The real estate market received a further boost from the money withdrawn from the second pension pillar. Loans were also made more affordable by the average interest rate on housing loans issued by banks reaching record low levels. The number of loans issued was 15% higher in both 2021 and 2022 than in previous years. The peak of growth in the housing loan portfolio of the banks was reached at 12.2% last September since when borrowing activity has backed off, though the growth over the year in the housing loan portfolio was still very fast in December at 11%. After the extraordinary amount of activity in the past couple of years, it was to be expected that the housing loan market would calm down.
Caution in an uncertain economic environment and the general rise in prices and interest rates led to a substantial decline in new housing loans in December. The banks issued a total of 170 million euros of housing loans in December, and the amounts paid out for new housing loans contracted sharply as the banks issued one fifth less in new housing loans than they did in the same month of 2018-2019, which was before the period of increased activity. Caution among households has applied the brakes firmly to demand. High prices for real estate combined with general inflation have made housing loans less affordable, especially for families on smaller incomes.
Demand for housing loans is likely to improve in future. The housing loan market usually contracts in the first months of the year, and this year may be expected to follow that pattern. What happens next depends largely on the confidence of households and their financial position. The rise in Euribor and general inflation will reduce enthusiasm for taking new housing loans, but wages continuing to rise will offer some succour. Housing loans are generally taken by households with an income above the average, which are also able to save more. These factors will support a recovery in confidence and in demand for housing loans.
Please note: Eesti Pank published the statistics for credit institutions and lease companies for December on its website today. The statistical release describes the main changes in the statistics on credit institutions 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.