SEB home purchasing power index: it takes about three years for a resident of Tallinn to save for a home loan down payment
OREANDA-NEWS. October 03, 2016. SEB’s analysis shows that a resident of Tallinn with an average income needs about three years to set aside enough money for the down payment to buy a standard apartment in a dormitory district or new development.
In Q2 2016, a resident of Riga earning an average income could afford a new apartment of 27.9 square metres, 1.9 square metres more than in Q2 2015. A resident of Vilnius earning an average wage could purchase a new apartment of 29.5 square metres, 0.3 metres more than in 2015.
“The home purchasing power index decreased in Tallinn by 0.8 square metres during the year – to 37 square metres – but in spite of the decline, a resident of the capital earning an average income could, without taking on any excessive risks or loan commitments, buy a standard apartment that is 9.1 and 7.5 square metres larger than that of a resident of Riga and Vilnius, respectively,” says T?nu Sepp, Director of the Retail Banking Division.
With respect to purchases of apartments in dormitory districts, the SEB home purchasing power index increased in the second quarter in Tallinn and Riga; however, compared to the first quarter, the Vilnius index declined a little. In Q2 2016, a resident of Riga earning an average wage could purchase a standard apartment of 52.2 square metres in a dormitory district, whereas residents of Tallinn and Vilnius could purchase homes of 42.8 and 41.3 square metres, respectively. The prices of secondary market apartments rose in all three Baltic States – in Vilnius and Riga, apartment prices appreciated more than the growth in real wages. However, in Tallinn incomes grew faster than apartment prices rose in the second quarter, mainly due to the seasonal income increase.
“Changes in the home purchasing power index correlate strongly with average home loan interest rates, which remain at very low levels in all three countries. The lowest interest rate for new home loans in the second quarter of this year was recorded in Lithuania: 2.06 per cent; it was 2.60 per cent in Estonia and 3.28 per cent in Latvia,” Sepp added.
When calculating SEB’s home purchasing power index, this time the period of time it takes to accumulate the first down payment for a home loan was also taken into account. In order put together the funds necessary for a 20% down payment to buy a 40 square metre standard apartment, a resident of Tallinn earning an average wage needs a little less than three years; residents of Riga and Vilnius need slightly less than two years and more than three years, respectively. It takes more than three years in Tallinn and over four years in both southern capitals to put aside enough money for a 20% down payment for a new apartment. The calculation is based on the assumption that a household saves 30% of its income.
*The SEB home purchasing power index indicates, in square metres, the size of a flat that a resident earning an average income is able to purchase using a loan, without taking an overly high risk (with a loan expiry date of 25 years, down payment of 20 per cent, and loan payment does not exceed 30 per cent of the borrower’s income). The index takes into consideration four factors that influence the home loan market: property price (average standard apartment in dormitory suburbs), income, inflation, and the interest rate.