Economic bubble involving major cities of Baltic states in 2000s
Illustration of House Price Index in the Baltic states compared to Euro Area during the housing bubble crisis in the Baltic states[1]Illustration of apartments' price in the Baltic states during the housing bubble crisis [2][3][4]
The Baltic states' housing bubble was an economic bubble involving major cities in Estonia, Latvia and Lithuania.[5][6] The three Baltic countries had enjoyed a relatively strong economic growth between 2000 and 2006, and the real estate sectors had performed well since 2000. In fact, in between 2005Q1 and 2007Q1, the official house price index for Estonia, Latvia and Lithuania recorded a sharp jump of 104.6%, 134.3% and 106.7%. By comparison, the official house price index for Euro Area increased by 11.8% for a similar time period.[1]
The crisis eventually hit in 2007 due to the financial crisis of 2007-08 resulting in fragile Baltic economies. The housing price correction had begun in Estonia by mid-2007 followed by Latvia and Lithuania in mid-2008.[1] Subsequently, Latvia and Estonia experienced recession by first half of 2008, while Lithuania had experienced a slowdown in its economy by the first half of 2008.[7] The situation worsened after the September 2008 global financial crash, sending the entire region into a full-blown recession. All three countries experienced recession by 2009.[7]
The increase of credit supply to private sectors was largely to be blamed for the housing bubble in the Baltic states, due to the availability of financing from foreign lenders (predominantly Scandinavian banks).[7] Domestic banks (notably Parex Bank, a national bank in Latvia) were largely reliant on rolling their foreign loans (denominated in Euro) with large exposure to the real estate sector.[8] The condition was further worsened due to the absence of loan-to-value ratio as well as negative real interest rate which spurred speculators to drive the market housing demand higher.[8] The credit supply was then deteriorated at the peak of the boom as both foreign and domestic banks tightened lending standards due to the higher credit risk in the region.[7] Subsequently, real estate market were dragged down, further deteriorate credit quality, forced banks to further tighten lending standards.[7]
The severity of the crisis differed from one to another; with Latvia was the hardest hit by the crisis. Latvia applied for balance of payments support from International Monetary Fund, the European Union and regional members in November 2008 in order to strengthen the fiscal situation following the bail out of Parex Bank (largest bank in Latvia).[9] Lithuania experienced lesser impact from the crisis compared to Latvia, as it adopted significant austerity measures and more stimulus measurements compared to the both Baltic states. Nevertheless, public sector wage faced cuts as well as lesser social benefits.[10] Estonia, on the other hand, saw the public sector wages and benefits slashed in order to improve the budget balance in preparation for the adoption of euro.[11]
^ abcEurostat (July 2013)House Price Index (2010 = 100) - Quarterly Data
^Statistics Estonia(2013). http://www.stat.ee/main-indicators Archived 23 November 2012 at the Wayback Machine. Most requested statistics - Statistics Estonia. Accessed on 19-09-2013
^Central Statistical Bureau of Latvia (2013)http://www.csb.gov.lv. Latvijas[permanent dead link] statistika (Statistics Database). Accessed on 21-09-2013
^Statistics Lithuania (2013).http://web.stat.gov.lt. Statistics[permanent dead link] Databases. Accessed on 22-09-2013
^Kallakmaa-Kapsta, Angelika, (2007), Factors influencing developments in the real estate market, Bank of Estonia, Kroon and Economy, http://www.eestipank.ee/en/publication/kroon-economy/2007/no-2-2007
^Kallakmaa, A. Before and After the Boom : Changes in the Estonian Housing Market. ISBN 9789949234431
^ abcdeServaas, D.; Elena, F.; Gabriele, G.; and Alessandro, T.(July 2010)The Tale of the Baltics: Experiences, Challenges Ahead and Main Lessons. European Commission
^ abLina, B.; and Daniel, K.(December 2012)Real Estate Price Dynamics, Housing Finance and Related Macro-prudential Tools in the Baltics. European Commission
^Kristina, M.; and Liva, Z.(2013)Economic Miracle in the Baltic States: An Exemplary Way to Growth?. Jacques Delors Institute
^European Commission (2010)Assessment of the Action Taken By Lithuania and Romania. Communication to the Council
^Kattel, R. and Raudla, R.(2013).The Baltic Republics and the Crisis of 2008-2011. Europe-Asia Studies
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