10/30/2007

News / Latvia's real estate star falls

Linked from: http://www.tehrantimes.com/index_View.asp?code=156017

RIGA (AFP) -- With real estate prices having risen 500 percent since 2002, Latvia has long been an investment hot-spot where the sector has outstripped its counterparts in EU member states.

But the Baltic state's property firms are getting gloomy as a government anti-inflation drive bites and jitters spill over from the United States' home loan crisis.

""Activities in the market have slowed down considerably. People are waiting, though nobody can really predict what will happen in the future. The situation is bleak,"" Aigars Smits, head of the Arco Real Estate company, told AFP.

Real estate prices began dipping in Latvia in May, after the government introduced a package of measures to fight rampant inflation, including stricter rules on issuing mortgages.

Latvian authorities say that the number of real estate transactions has now shrunk to the level of 2001, before the boom kicked in.

In January, there were a total of 38,282 registered deals. But last month the figure fell to 25,689, or 10,800 fewer than in September 2006.

Since notary deeds are required to launch a real estate deal, figures from that profession are also food for thought: Ilze Pilsetniece, head of Latvia's notary council, said requests for deeds have dropped by 40-50 percent in recent months.

In September, the price of apartments in the city's standard Soviet-era housing blocks dropped by 1.2 percent compared to the previous month.

According to calculations by real estate agency Ober-Haus, the average price for such apartments is 1,570 euros (2,236 dollars) per square meter.

The figure is still five times higher than in 2002, and represents a hefty mortgage burden for would-be buyers in a country where the average gross monthly salary is worth around 550 euros.

Prices in Riga's prestigious Old Town district, meanwhile, range from 4,000-6,000 euros per square meter.

Market confidence has also taken a battering because of the U.S. Sub-prime crisis, caused by the default-fed collapse of firms which provided mortgages to people with poor credit histories, often allowing them to buy homes beyond their means.

""Besides local factors, there is a worsening situation in global financial markets. The crisis is near,"" said Vladimirs Markovs, head of the real estate company Nira Fonds.

Latvia's economy has been growing rapidly since the country joined the European Union in 2004, fueled largely by consumption.

In 2006, it grew by 11.9 percent, the fastest rate since independence from the Soviet Union in 1991 and one of the strongest growth rates in the EU.

But robust growth has gone hand in hand with spiraling inflation: in September, the cost of living in Latvia increased by 11.4 percent on a 12-month basis, the fastest rate in more than 10 years.

At the same time the country has a current account deficit of 24 percent of gross domestic product -- the highest in the EU -- leaving it potentially exposed to a global crunch.

There have been repeated warnings from the World Bank and other financial institutions that a global slump could hit Latvia and several of Europe's other former communist countries particularly hard.

But the Latvian government has dismissed suggestions that major problems are on the horizon, saying the economy is bound for a ""soft landing"" thanks to its anti-inflation plan and other economic stabilization measures.

Andris Vilks, chief economist at SEB Unibanka, Latvia's second largest credit issuer, played down the likelihood of a US-style loans crisis in the Baltic state, rejecting suggestions that lending policies have been sloppy.

""I don't predict a massive bankruptcy of households. The level of bad loans are very low -- about 0.4 percent in our bank and no more than 1.0 percent on average in all Latvian banks. Maybe this figure will increase, but not in huge amounts,"" Vilks said.

Some Latvian experts also say the slowdown is related neither to the U.S. mortgage crisis nor Latvia's anti-inflation plan.

""Latvia reached maximal real estate prices at the end of the last year already. Everybody in the banks and in the market understood that,"" Raita Karnite, director of the economics institute of the Latvian Academy of Sciences, told AFP.

""The anti-inflation plan came later and coincided with a natural slowdown and falling prices.

""The only merit of the anti-inflation plan was that a small group of middle-income people now have more restrictions to get loans. But they were not the ones boiling the market. Many profiteers had already withdrawn their investments,"" she said.



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