Housing Market in Lithuania

From the IMF’s latest report on Lithuania:

“To address potential risks to the financial sector from rising residential real estate prices, the BoL has implemented a series of macroprudential measures. These include tighter down payment requirements for second and subsequent housing loans and a new sectoral systemic risk buffer for banks with the largest mortgage portfolios. The distribution of loan-to-value ratios on new loans has shifted down since the measure was implemented. The BoL estimates that these measures could reduce new mortgages by 10 percent and slow house price growth by as much as 3 percent. However, the effectiveness of capital-based measures might be limited given excess capital and the profitability of the banking system. Addressing some of the underlying structural bottlenecks in housing supply will help contain real estate prices that, over the last year, appear to have deviated from fundaments in the Vilnius area. This would require a comprehensive approach to regional development and changes in land-use policies to increase allocation to residential housing.

Given higher uncertainty, the emphasis should remain on mitigating potential financial stability risks. While the banking sector remains among the most concentrated in the EU, the degree of concentration across loan segments—and most notably consumer loans—has declined after the third largest bank completed its restructuring. At the same time, interest rates on loans have declined without affecting credit standards. Low interest rates and strong household income are factors driving the boom in the residential real estate market. However, rapidly rising house prices, record sales, buyer intent indicators, and an increase in secondary mortgages may be signs of overheating. Nearly half of real estate transactions do not involve a mortgage, suggesting that an increase in interest rates may have a limited effect on house prices. The expected rapid growth of an online fintech bank focused on non-resident activity and ambitious expansion plans across the EU will require sustained supervisory efforts by national and supranational authorities.”

Posted by at 6:32 AM

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