Hypostat 2015

EU 28 Country Reports
Estonia
By Olavi Miller, Central Bank of Estonia
Macroeconomic Overview
Estonian GDP real growth rate was 2,1% in 2014 and 1.7% y-o-y in the first
quarter of 2015. This growth has been largely supported by continuous strong
domestic demand that grew in 2014 by 4.7%. Although wage growth has somewhat
slowed, the increase in employment and very low inflation (partly deflation)
boosted private consumption. In 2015, wage growth is expected to continue losing
steam, but private consumption will be supported by a 1% VAT cut to 20% and
an increase in social benefits.
Higher incomes in 2014 flowed partly also into private savings, increasing the
household savings rate to 7.5%. Corporate investments slowed partly due to
lower profitability as did government investments, coinciding with the EU budget
year changing. Overall fixed capital formation decreased by 1.5% but remained
at a generally high level of 25.8% to GDP when compared to other European
Member States.
2014 GDP growth was spaced evenly across sectors with few exceptions having
a negative impact on growth. The biggest negative contributions to GDP growth
were -0.3 p.p. and -0.6 p.p. from the land transport sector and activities supporting
transportation respectively. The transportation sector was negatively affected
mainly by the strong depreciation of the rouble in 2014 and resulting falling
exports to Russia. Despite the weak demand of Estonian main trading partners,
the national current account has improved and the deficit in 2014 was less than
0.1% of GDP. In fact, export of goods and services increased in the first quarter
of 2015 in nominal terms.
Unemployment fell in the second quarter of 2014 and by the first quarter of 2015
the unemployment rate was 6.6%. Participation in the labour force has been
steady at around 68%, while the number of working age persons has decreased
by 0.8% on 2014 due to natural shifting of the population pyramid (0.5%) and
due to migration (0.3%).
Average wage growth has been slowing down to 5.6% in 2014 but real income
has at the same time increased due to low inflation and deflation in the second
half of 2014. The deflation was mainly caused due to a decrease in import prices
of energy and foods. CPI fell in 2014 by 0.1% but has reversed again in the first
quarter of 2015.
Housing and Mortgage Markets
The Estonian real estate market stabilised to an extent in 2014. Prices rose less
quickly in the apartment market, which is the largest share of the total real estate
market, and rose by less than those of residential land with buildings and land
without buildings. The largest part of the increase took place in the first half of
the year, but the difference between prices in large towns and those in small
towns remains substantial.
On the back of a rapid rise in apartment prices at the end of 2013 and in early
2014, the supply of real estate in Tallinn increased, which was seen in the rise
in the number of offers on real estate websites. The increase in supply was also
driven by the number of construction permits issued, which hit a post-boom
record at the start of 2014. Naturally, the prices of newly built apartments affect
the average transaction price. There has been some change in the structure of the
market, which can be seen in the average price rising faster than the median price.
At the beginning of 2015, house prices picked up again and the median prices in
Tallinn grew by 3.8% in March while overall in Estonia the median price increased
by 7.4%. Due to a shift to newer apartments the average price per square meter
increase was even larger at 9.9%. The number of transactions increased by 5%
in Tallinn and by 7.2% in Estonia.
Real estate prices are gradually rising and those in the biggest cities, such as
Tartu and Tallinn, are around the peaks they reached in 2007. This said, the
situation in the real estate market is quite different from what it was during the
economic boom. This is best reflected in the figures for real estate affordability,
which compares the median square metre price of apartments to gross monthly
wages. The affordability indicator reached 1.8 at the peak of the price boom in
2007 and then fell to 0.8 during the market correction in 2009. It stood at 0.95
in the last quarter of 2014, which means that real estate prices are now mainly
rising together with gross monthly wages.
Demand in the commercial property market for class A office buildings remains
high. Real estate agencies estimate 5-10% of such buildings to be vacant. Also
for new retail space demand continues to be high. The construction of retail premises
picked up in 2014. In fact, the usable retail space with construction permits
roughly doubled in 2014. Large one-off projects are behind this extraordinarily
fast growth however.
Household loan liabilities continued to increase gradually last year, with housing
loans accounting for the majority of such liabilities and increasing by 2.6%. Rising
incomes meant that indebtedness did not increase and household debt stood at
70% of disposable income and 40% of GDP in the second half of 2014. As deposits
grew at a similar rate to loan liabilities, the ratio of deposits and cash to debt
for households remained relatively high and stood at 78.6% in the last quarter.
The household interest burden was affected by the mild growth in loan liabilities
and the fall in base interest rates, and remained at 2% throughout the year. The
6-month EURIBOR, which is the base interest rate for the majority of housing
loans, fell in response to the monetary policy measures of the Euro System to
0.09% by the end of March 2015. The financial standing of households and their
ability to repay their loans remain good in 2015 due to the rise in incomes and
low interest rates.
Mortgage Funding
The household loan portfolio continued to grow steadily, increasing by 2.9% over
the year to around EUR 6.0 billion euros. This growth is again being driven by the
steady take up of mortgages in the relatively active real estate market. Around one
fifth more mortgages were granted in 2014 than in 2013, and the total mortgage
portfolio grew by 2.6% over the year. The total volume of other household loans
was almost the same at the end of last year as it was at the start of the year. In
the first quarter of 2015, mortgage funding increased by 12% compared to the
previous year. The 6-month Euribor fell in March to its lowest level yet at 0.1%.
The average interest rate of new mortgage loans has been steady at a historically
low level of 2.2%.
2015 EMF HYPOSTAT | 37