Riga - Following three years of a booming real estate property market, the Baltic states might be seeing the end of it. Residential real estate prices in three Baltic capitals have been dropping gradually since last year as consumers have grown pessimistic about the economic future.
In Tallinn, for example, the price for popular two- and three- bedroom apartments has dropped 10 to 15 per cent, while prices on apartments in Riga last year fell by 10 per cent, Violeta Klyviene, a Danske Bank economic analyst for the Baltics, said.
Real estate prices have been too high for the income level of the Baltic states, she told Deutsche Presse-Agentur dpa. This was even more pronounced in Latvia, one of the poorest countries in the European Union, where apartment prices have reached and even exceeded the price level of a similar real estate in Berlin or Paris.
In the third quarter of 2007, the number of real estate transactions in Estonia dropped 24 per cent, compared to the same period in 2006, Aare Tammemae, chairman of the management board of Estonia's real estate company Arco Vara, told dpa.
Availability of easy credit funded mainly by Scandinavian banks fed the Baltic real estate market boom in the transitional economies where credit was not available before they joined the EU.
Last May, the Latvian government made it harder to obtain credit as part of the measures to curb the record-breaking inflation.
High inflation and strong current-account imbalances in three Baltic states have stirred fears that the small Baltic economies are headed for a "hard landing." While those fears may not be as strong as they were four months ago, the public continues to be nervous about the economic outlook.
While Latvian inflation remains the highest among the EU's 27 member countries - reaching more than 14 per cent in December 2007 - credit lending has fallen by 34.2 per cent to the lowest levels since October 2000.
Concerned over a drop of 50 per cent in the level of lending in the Baltic country, the Bank of Latvia announced earlier this month it was hiking its rate on night deposits by one full percentage point to 3 per cent.
Bank governor Ilmars Rimsevics announced the move, saying that the bank also had decided to reduce the reserve ratio for bank liabilities with a maturity of over 2 years from 8 to 7 per cent in order to make more money available for lending.