Estonia's property boom continues
Last Updated: July 08, 2015
During the year to end-May 2015, the average price of apartments in Tallinn, Estonia’s capital, soared by 12.33% (12.43% inflation-adjusted) to €1,549 per square meter (sq. m), according to Ober Haus Real Estate Advisors. During the latest quarter, apartment prices in Tallinn rose by 4.17% (3.06% inflation-adjusted).
This is in line with figures released by Statistics Estonia, which shows that the average purchase price of dwellings in the whole country rose by 11.04% (12.04% inflation-adjusted) in the first quarter of 2015 from a year earlier, to €1,032 per sq. m.
However, the national figures do not reflect the movements of house prices in each of the country’s major cities during the year to end-Q1 2015:
- In Tallinn, Estonia’s capital, the average price of dwellings purchased surged by 8.61% to €1,543 per sq. m.
- In Tartu City, the second largest city and the intellectual capital of Estonia, the average price of dwellings purchased rose by 5.52% to €1,204 per sq. m.
- In Parnu City, the country’s summer capital, located in the southwestern, the average price of dwellings purchased fell by 5.62% to €834 per sq. m.
- In Estonia excluding Tallinn, the average purchase price of dwellings soared by 13.63% to €633 per sq. m.
After Estonia's amazing 36% annual house price rises from 2004 to 2006, prices of dwellings started to fall in 2007, partly due to the global financial meltdown.
- In 2007, the average price of dwellings dropped by 1.5% (-9.7% inflation-adjusted)
- In 2008, the average price of dwellings plunged by 18.3% (-24.5% inflation-adjusted)
- In 2009, house prices plummeted by 30.5% (-29.1% inflation-adjusted)
After these 3 horrendous years, a house price recovery began in the second half of 2010, with the average price of dwellings rising modestly by 4.1% (-1% inflation-adjusted). In 2011, nationwide house prices soared by 12.3% (7.9% inflation-adjusted). In 2013, house prices surged 14.5% (12.9% inflation-adjusted), after rising by 5.4% (1.6% inflation-adjusted) in 2012. In 2014 property prices continued to rise, with house prices rising by 8.46% (8.95% inflation-adjusted).
Estonia’s housing market is expected to remain robust this year, according to local property experts.
Estonia's economy is expected to grow modestly by 2.5% this year, after real GDP growth rates of 2.1% in 2014, 1.6% in 2013, 4.7% in 2012, and 8.3% in 2011, according to the International Monetary Fund (IMF).
Rental yields moderate in Tallin
Rental yields have risen this past year in Tallinn, the capital of Estonia.
A 40 sq.m. apartment costs around EUR 1,800 per sq. m. (EUR 169 per sq. ft.) while a 120 sq. m. apartment costs around EUR 2,200 per sq. m. (EUR 206 per sq. ft.).
Renting costs, on average, EUR 384 for a 40 sq. m. apartment per month, whereas for a 120 sq. m. apartment (1,291 sq. ft.), monthly rents are around EUR 1,145. Average rents per sq. m. are around EUR 9.4 per month.
Gross rental yields from apartments in Tallinn are moderate, ranging from 5.3% to 6.3%. Smaller apartments tend to earn higher rental returns. A 40 sq. m. apartment has moderate to good rental yields at 6.3%, whereas a 120 sq. m. apartment earns somewhat poorer rental yields at 5.3%.
Round-trip transaction costs on residential property in Tallinn are low.
Taxes are high in Estonia
Rental Income: Nonresident individuals are liable to pay 21% withholding tax on their gross income. No deductions and personal allowances are given. Withholding taxes are final taxes, so the non-resident has no obligation to file tax returns.
Capital Gains: Capital gains from the sale of immovable property are aggregated with other income and taxed also at 21%.
Inheritance: There are no inheritance taxes in Estonia.
Residents: Residents are taxed on their worldwide income at a flat rate of 21%.
The previously announced income tax rate reductions have been cancelled.
Roundtrip Estonian transaction costs are very low
Total transaction costs are between 2.57% and 5.59%. The main cost is the realtor’s fee, which varies between 2% to 4% depending on the size of the apartment. All costs are paid by the buyer.
The Estonian tenancy term trap
Estonian rental market practice is pro-tenant.
Rents: ‘Luxury’ housing category is free from rent control. Other housing is subject to a prohibition on “excessive rents” (Law of Obligations S301). The landlord can ask for up to three months’ deposit.
Tenant Security: Contract periods can be freely agreed between landlord and tenant, but there are dangers – upon expiry of a specified term lease, the tenant may demand that the contract be extended for up to three years, and in fact the tenant can demand repeated extensions. In addition, unless care is taken, specified term contracts can default to ‘unspecified term contracts,’ in which tenant eviction is difficult.
Estonia: Modest economic growth, falling unemploymentEstonia is a small country of 1.32 million people, with a GDP per capita of €19,671 in 2014, according to the International Monetary Fund(IMF). The most prosperous Baltic state, its success is attributable to bold liberalization measures adopted in the early 1990s. It was the first Former Soviet Union (FSU) state to be invited by the European Union (EU) to start negotiations in 1997, and was formally admitted into the EU in May 2004, a few months after joining NATO. The in January 2011, the euro became the official currency of Estonia.
From 2000 to 2006, Estonia’s economy expanded by an average of 8% annually, including resounding 10.4% GDP growth in 2006, and 9.5% growth in 2005. In 2007, GDP growth was 7.9%, one of the highest growth rates in the EU. Unemployment fell from 13% in 2000, to just 4.6% in 2007.
The economy contracted by 5.3% in 2008, and by a staggering 14.7% in 2009. As the country fell deeper into recession, the government cut spending by about 7.8% in 2009. It kept its income tax rates low, but hiked VAT by 2% to 20% in July 2009. By 2010 Estonian unemployment had risen to 16.7%.
The economy recovered in 2010 with GDP growth of 2.5% and a fiscal budget surplus. In January 2011, Estonia was the first country since the financial crisis to join the Eurozone.
Estonia had astounding growth of 8.3% in 2011, with strong exports. Unemployment fell to 12.3%. Then in 2012, the economy expanded by 4.7%, bolstered by construction and export growth.
However, the economy slowed sharply in 2013, with real GDP growth rate of just 1.6%, mainly due to the high reference base of government sector investments, weakness of exports and rising inflation.
Estonia's economy grew by 2.1% in 2014 and is expected to expand by another 2.5% this year, according to the IMF.
Unemployment was down to 7% in 2014, from 8.6% in the previous year. During the first quarter of 2015, nationwide unemployment rate stood at 6.6%, up from 6.3% but down from 8.5% in a year earlier, according to Statistics Estonia. Thejobless rate is expected to remain unchanged, at 7% this year.
In 2014, the average monthly gross wages and salaries rose by 5.9% y-o-y to €1,005 while the average hourly gross wages and salaries also increased 7.2% y-o-y to €6.14, according to Statistics Estonia. Yet inflation is expected to remain low at 0.4% in 2015.
In 2014, Estonia registered a government surplus of about €121 million or 0.6% of GDP, from deficits of €40 million in 2013 and €39 million in 2012, according to Eurostat.
Estonia had the smallest national debt level across the European Union, at just €2.07 billion or 10.6% of GDP last year.