The real estate market will find its equilibrium without any major crash says Ülo Kaasik
Deputy Governor of Eesti Pank Ülo Kaasik said today at a real estate conference organised by the newspaper Äripäev that the rise in the six-month Euribor to close to 3% puts it at a level where the economy should be functioning under normal circumstances, and Eesti Pank does not see that there should be any major problems for the Estonian real estate market. He said that the central bank will for the time being have to keep raising interest rates.
He described what is currently happening in the Estonian real estate market as the steam being released from the boom of the last year and a half, during which there were signs of overheating in the market. A higher cost of borrowing, a loss of confidence among people and companies, and a reduction in purchasing power have together brought down demand for new loans, and so prices have fallen in the real estate sector. However, the boom in Estonia was relatively short, and so it did not cause any major imbalances in the economy nor any build-up of excessive debt levels. This gives grounds to believe that a new equilibrium will be reached after the peaks of the boom without any major crash or crisis.
“If wages continue to rise in the years ahead and inflation recedes, people's purchasing power will start to recover and the real estate sector will find a new equilibrium at a more reasonable level”, said Mr Kaasik.
He said that the fall in energy prices gives hope that inflation will recede. “The drop in gas prices has been remarkable”, said Mr Kaasik, recognising as well the efforts that Europe has made to find alternatives to Russian gas. “Cheaper energy will ease inflation pressures, and gives hope that the economy will start to recover. The initial forecasts for the price of energy were much higher”.
He did not however want to be too optimistic, as there remains a great deal of uncertainty about the future. Inflation remains high and is coming down slowly, as price pressures remain in the labour market and the service sector. The European Central Bank has indicated that interest rates in the euro area will still have to rise further from their current levels.
“This is needed to calm inflation, which is eating into the purchasing power of people’s incomes”, explained Mr Kaasik.
The European Central Bank has raised the key interest rates in the euro area on five occasions since last July. The six-month Euribor rate for interbank lending in Europe has followed the higher central bank interest rates and has moved beyond 3%. Mr Kaasik said that interest rates have come close to their normal level.
“This is a level where the economy should operate in normal times”, he said, adding that there should be no expectation that ultra-low interest rates would come back any time soon.
He said of the ability of borrowers to cope with their loan repayments that the central bank has set requirements for lending. “We have asked the banks to test separately when they lend whether the borrower can cope with higher interest rates”. This suggests that households will be able to cope. They will be helped in doing so by the strong labour market and continuing rises in wages, which will restore purchasing power as inflation fades. Borrowing must however in every case and at all times be thought through carefully.
“As a central bank we have repeatedly emphasised that borrowers should consider all the different risks they face, including the risk of a rise in interest rates”, concluded Mr Kaasik.
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