RESIDENTIAL MARKET REPORT 2020 Certainty about the future and solvency have always determined the situation on the residential market. Residential construction can be the driving force that helps us recover from economic stagnation. The opposite is also possible, namely acceleration of the economic EDGARS downturn, making housing more expensive at an inopportune moment. ŠĪNS The discussion about the rapid rise in real estate tax payments is very Chairman of the Board untimely. at Latio 2 REAL ESTATE MARKET IN LATVIA AND GLOBALLY 3 Latvia Global January January • A good growth in the energy sector thanks to higher water flow. • The China-US relations are improving. Industrial sectors are facing Adverse situation in wood processing. Weaker results in the downturn. Domestic demand remains strong in most countries. Only the processing industry, a decrease in the amount of cargo transported Chinese economy has been significantly affected by the virus. and a decline in demand on external markets. Economic activity February mainly relies on domestic consumption. • Coronavirus has become the most significant risk to the world economy, and February a recession is inevitable. Prices of oil and other raw materials are dropping. There is a deficit in certain categories of goods. Suspension of production, • The state budget is based on optimistic GDP forecasts (the MoF supply chain disruptions. Crisis in the tourism sector. Securities market slightly adjusts them downwards). Recession in the cargo transit turmoil. sector. Low lending activity in the banking sector. March March • Decline in industrial output. Production is partially resuming in China. The • Residents postpone travel and spending and avoid public places. virus has affected Europe. Demand for oil is falling sharply, and oil prices Companies postpone decisions on new investments and business have suffered the worst since the Gulf War. The first drop in the number of development. A state of emergency is declared in the country. The international tourists in the world since 2009. Large fluctuations on financial economy and foreign trade are balanced, and the state budget markets. The importance of the Internet and automation is growing. The deficit is relatively low. Decline in economic activity. The state number of US unemployment claims reaches new records every week. In develops and implements a support programme to mitigate the Germany, the sharpest decline is seen in industrial production. effects of the crisis. The aviation, accommodation, catering and April entertainment sectors are suffering severely. The production sector • Unemployment is growing worldwide. The IMF reports that 50% of the faces problems with closed borders, suppliers and new orders. world’s countries have sought assistance to receive emergency loans. The Unemployment is rising. world is facing the biggest crisis since World War II, with major economies April showing a very sharp decline. Rapid decline in export orders and difficulties • The daily habits (shopping, leisure, etc.) of the population are in the processing industry. National central banks and governments are changing; people are working remotely. The society has become implementing unprecedented fiscal and monetary incentives. less mobile; uncertainty about the future makes people revise their May expenditures. • The China-US relations have deteriorated again due to the virus. People May cut spending and start saving. Mobility data show that Europeans have • The main risks to the national economy are seen from the outside. started moving around again. Widespread violent protests and riots in the The negative effects of COVID-19 are observed in almost all US following the death of an African American detained by police. Protests sectors. The role of the local market is growing. On 15 May, the against racism are starting in many parts of the world. borders are opened to the people of the Baltic States. Economic June activity is starting to pick up. • Measures to contain the spread of COVID-19 have a negative impact on the world economy. High uncertainty in the world; the virus has also hit CURRENTSITUATION June developing countries severely. Social and ethnic tensions are escalating in • The state of emergency in the country is lifted and many the world. Protectionism is on the rise. Europe assumes that the worst restrictions are eased significantly. stage of the economic crisis has been passed through. 4 Data on Loans and Deposits In response to COVID-19, households chose to save money instead of spending, as well as revise the Balances of Loans Granted by Banks to terms and conditions of their loan contracts. Households (million EUR) 4 350 600 Balances of household deposits increased by 10% in Balances of Household Deposits 4 300 500 April and May (compared to the corresponding period 4 250 400 11 000 20% 4 200 of 2019). Balances of loans granted to households 300 9 000 10% 4 150 were increasing monthly this year and decreased in 200 7 000 0% 4 100 May. Consumer credit has been declining since the 4 050 100 '19.02 '19.03 '19.04 '19.05 '19.06 '19.07 '19.08 '19.09 '19.10 '19.11 '19.12 4 000 0 '19.01 beginning of the year. Deposits (millions EUR) '19.01 '19.02 '19.03 '19.04 '19.05 '19.06 '19.07 '19.08 '19.09 '19.10 '19.11 '19.12 '20.02 '20.03 '20.04 '20.05 '20.01 Deposits (change against the corresponding period of the previous year,%) According to the information by the Bank of Latvia, the Credit for buying house Consumer credit (right Y axis) increase in the amount of revised loans for house Other credits (right Y axis) purchase starting from March is related to the state of emergency introduced during the COVID-19 pandemic. The number of new loans decreased by 45% in April Weighted Average Interest Rates on Loans (compared to April 2019) and by 47% in May. Granted to Households and Deposits Amount of New Transactions and Revised Loans Attracted (for New Transactions) to Households (million EUR) Meanwhile, interest rates on loans to households for house purchase decreased in March, but increased 5,00 3,02 3,30 150 -45% (Y/Y) again in April and May (the weighted average interest 3,00 100 4,32 3,38 rate in May was 3.3%). 1,00 50 -47% (Y/Y) 2,36 2,34 -1,00 0 '19.01 '19.02 '19.03 '19.04 '19.05 '19.06 '19.07 '19.08 '19.09 '19.10 '19.11 '19.12 '20.01 '20.02 '20.03 '20.04 '20.05 '19.01 '19.02 '19.03 '19.04 '19.05 '19.06 '19.07 '19.08 '19.09 '19.10 '19.11 '19.12 '20.01 '20.02 '20.03 '20.04 '20.05 Total actual annual cost interest rate for loans to households for the purchase of housing Revised credits for households for the purchase of housing Deposits by households with fixed maturity New loans for households for the purchase of housing CURRENTSITUATION 5 Data: Bank of Latvia Imports and Exports of Goods 400 000 Imports and Exports of EU Goods (million EUR) 350 000 Imports and exports of EU goods dropped both in 300 000 April and March, as COVID-19 made it more difficult 250 000 to cross borders and led to reduced consumption and production. 182 865 179 278 177 241 177 483 178 356 176 257 176 177 231 176 739 179 338 200 000 179 681 164 885 150 000 126 746 In March, compared to March of the previous year, 100 000 exports in Latvia decreased by 1% and imports – by 50 000 162 801 161 997 161 882 161 496 161 283 160 738 160 160 077 159 847 158 507 156 814 8%, followed by a significant decline in April, with 142 227 0 128 081 imports dropping by 27% and exports – by 14%. 2019.06 2019.05 2019.07 2019.08 2019.09 2019.10 2019.11 2019.12 2020.01 2020.02 2020.03 2020.04 Imports of goods Export of goods Imports and Exports of Latvian Goods (million EUR, provisional) 3 000 2 500 2 000 1 373 1 456 1 375 1 272 1 319 1 293 1 399 1 500 1 396 1 187 1 155 1 222 992 1 000 500 992 1 208 928 1 142 1 112 1 103 1 099 1 089 1 078 1 062 1 040 1 021 0 CURRENTSITUATION 2019.05 2019.06 2019.07 2019.08 2019.09 2019.10 2019.11 2019.12 2020.01 2020.02 2020.03 2020.04 Eksport Import 6 Data: Eurostat and Central Statistical Bureau Unemployment and Consumer Prices Unemployment in the EU grew at a slower rate than, for example, in the US (in April 2020, Unemployment rate by month compared to April 2019, unemployment increased by 11 percentage points). 16,0 14,0 The highest unemployment rate in the EU was 12,0 10,0 recorded in Spain (14.5%), but it was higher 8,0 than the EU average before the pandemic. The 6,0 lowest unemployment rate was recorded in the 4,0 Czech Republic (2.4%). 2,0 0,0 In April, compared to March, the unemployment rate in the three Baltic states increased by 1.6%, 2% and 1.2% in Latvia, Lithuania and 2019.05 2019.02 2019.03 2019.04 2019.06 2019.07 2019.08 2019.09 2019.10 2019.11 2019.12 2020.01 2020.02 2020.03 2020.04 2020.05 2019.01 Estonia, respectively. Latvia Lithuania Estonia Spain Following market rules, consumer prices began Czech EU Average US to fall in countries where unemployment increased. Deflation was observed in May in some of the countries studied (Latvia, Estonia, Changes in consumer prices by month Spain and the US).