In July, consumer prices in Latvia grew by 21.5% year on year. Several populated areas already saw the new heating tariffs taking effect, while the population making level payments for gas was the first to notice a substantial rise in gas tariffs. July also witnessed mounting energy prices; at the same time, the prices of other services and goods took an upward trend as well. In autumn, the authorities assess inflation could be somewhat slowed down by the planned government support. Indeed, it should be noted that these measures would not weaken the inflation statistically but narratively help households with either the lowest income or the highest increase in costs live through this period. Prudence is golden. In fact, this will rather worsen the forecasted beginning of the next year, taking into account a possible further rise in gas tariffs and dilapidated savings owing to both the previous heating season and mounting prices. There is no easy way out, many defining steps need to be taken now, especially regarding energy efficiency, and the monetary policy tools to reduce inflation if favour of macro stability. Odds are that the latter one is now an unsolvable political issue.
In this scenario, the Credit Register maintained by Latvijas Banka provides information on the real estate collateral location, which makes it possible to carry out the analysis of lending for house purchases in Latvia’s regions. The first conclusion drawn from the Credit Register data: residential lending is concentrated in Riga city and the Riga region. In June 2021, loans to households for house purchases secured with the real estate registered in the above regions constituted 82.1% of all housing loans. By contrast, the share of real estate registered in Latgale constitutes only 1.5% of housing loans. Regional disparities in residential lending have increased significantly over the past few years, and it is reported that interbank competition is insufficient. The most stringent conditions governing lending can be observed in Latgale, but in Riga city, the Riga region and Zemgale are more favourable.
The recovery of lending for house purchases from the initial short-term shock caused by the pandemic is in line with a more vigorous real estate market development. Rising demand for housing on account of households wishing to improve their living conditions or use the option of working remotely more extensively as well as better-off individuals looking for investment opportunities is a contributing factor. Higher demand is underpinned by both an improvement in the financial position of households and larger savings as well as the state support programme for families with children. The increase is mostly attributable to large loans for house purchases over 100 000 thousand euros, which could be explained by higher activity in the private house segment, including construction thereof. This rise, however, started from a low base, as the lending dynamics were fairly weak over the decade following the previous crisis (2009–2018). New loans are still below the pre-2008 levels: in the second half of 2008, the total amount of new housing loans was 221 million euros, whereas, from the second half of 2006 to the first half of 2007, the average quarterly amount was over 675 million euro.
In Latvia, the growth of lending for house purchases has so far been moderate. Other Baltic countries are quite different in this respect, as Lithuania and Estonia have been recording solid growth already since 2014 and it has been rather significant since 2016. The real estate markets in Lithuania and Estonia have also been much livelier than in Latvia over the most recent years. In order to address the housing market risks, the Bank of Lithuania tightened the macroprudential measures concerning lending for house purchases by setting the loan-to-value (LTV) ratio requirement for second-time and subsequent borrowers purchasing housing property at 70% as well as introduced a 2% sectoral systemic risk buffer for housing loans. The Bank of Estonia has also decided to introduce a 1% countercyclical capital buffer. In Latvia, any noteworthy expansion in housing loans started only in 2021, with the growth rate in December reaching 4.1%. Lending growth is dampened by significant repayments on loans granted before the crisis of 2008 which still constitute roughly 1/3 of all outstanding housing loans and are dominated by annuity mortgages, i.e. loans with gradually increasing principal repayments.
State-supported programme for house purchase continues to provide a significant boost to lending for house purchase: in 2021, 44% of new loans for house purchase were granted within the framework of this programme, representing already 27% of all outstanding loans for house purchase at the end of December. On the other hand, the state support programme has lowered the effectiveness of the macroprudential policy. In 2021, about 27% of all mortgage loans for house purchases were granted with LTV above 90%, and the volume of such riskier loans in absolute terms continues to rise. The mismatch between the rising demand and the overall stagnating supply contributes to the acceleration of housing prices. The state guarantee programme in its current form is an additional contributor. The programme was introduced at a point when the real estate market was depressive and the mortgage lending growth was deeply negative. It had a significant growth-promoting role under those circumstances, but, at the current juncture, its side effects are becoming increasingly more prominent. Fire cannot be fought with fire, nor inflation with monetary stimuli.
