Latvian housing bubble, part 2

As I mentioned in the previous post, Latvian real estate prices have increased 61.2% in one year. The most important reason behind that is, probably, the wider availability of bank credit in Latvia.

In 1990s, when I grew up in Latvia, it was fairly common to pay the entire amount upfront, when buying an apartment. The economy was fairly unstable and, if the banks issued credits for purchase of housing, the credits would be repayable in 5 years and would have quite high interest rates (20% or so? I no longer remember exactly). A friend of mine took one of those and then realized that the terms were so bad that he would have been better off if he had borrowed money from friends instead of the bank. This is largely why apartment used to cost 7000 or 20000 dollars those days.

With Latvian economy recovering from the post-Soviet slump and the outlook for the future becoming more certain, banks became more willing to issue long-term loans to their customers. Interest rates fell, 5 year loans were replaced by 15 year, then 30 year, than 40 year. When Latvia joined European Union, the interest rates fall to a level than was just slightly higher than in Western Europe. Latvia had gone from post-Soviet economic chaos to normalcy in just 10 years.

The speed at which credit became available was, however, much faster than the speed at which new apartments were built. And, so, the prices spiralled up. Also, since most Latvians don't have much savings, many of new loans (from 40% to 70%, depending on the bank) have been financed by borrowing from abroad. The foreign banks now saw Latvia as a part of European Union (rather than part of post-Soviet chaos) and were very willing to lend the money. The inflows of credits from foreign banks soon became comparable with the entire export revenue of Latvia:

• Latvian exports in 2006: 3.294 billions lats.
• Money borrowed abroad by Latvian banks in 2006:2.214 billion lats

In short term, this influx has been good for Latvian economy. Whenever someone buys an apartment with borrowed money, someone else gets the money by selling the same apartment. And that money is then spent in Latvia on goods and services, benefitting people who produce or sell those goods and services. Latvian economy has been growing 11% per year, average salaries are growing at about 30% per year. The tax revenues of the government are expected to grow 29.6% this year, which might mean that Latvian teachers will not be as underpaid as they used to be.

In longer term, it is not clear how long those trends will continue. Foreign banks might not be willing to issue new credits in so large amounts to Latvia forever. When the inflow of new credits into Latvia slows down, it can bring down the housing prices and, more generally, slow down the Latvian economy quite a bit.

Part 3 on real estate and Latvian economy coming in a few days...

Latvian housing bubble, part 1

I might move back to Latvia later this year or in 2008 and I just started researching the real estate market, over Internet and by consulting friends in Latvia.

It's quite expensive. 1 bedroom apartments in Soviet era buildings (built 20-40 years ago) cost from 70,000 to 110,000 Euros (100,000 to 150,000 US dollars). Bigger apartments or ones in newly built buildings are even more. Houses start at 200,000 Euros (260,000 US dollars) and can cost much more if they are in a good location. (I'm not even trying to figure out how much more. I wouldn't be able to afford that on a Latvian salary anyway.)

It's not quite London or New York prices but, according to newspapers, real estate in Riga is already more expensive than in Vienna or Frankfurt. And I've heard stories of people who have sold a run-down house in Latvia and discovered that they could buy a house at a much better condition on the Mediterranean coast of France for the same amount. At the same time, the average income in Latvia is still 4-5 times less than in US or France or Germany. As a result, most of population is completely priced out of the housing market.

It wasn't always this way. In mid-1990s, one could buy an apartment in Riga for 20,000 dollars. The only similarity with today is that it was unaffordable for most people. The incomes were much lower than now and bank credit was almost unavailable. Now, 40-year loans are common, the interest rates are almost as low as in Western Europe. The incomes have increased substantially, except that...

The increase in real estate prices has outpaced that all! Economists are talking of global housing bubble and Latvia seems to be at the forefront of it. The home prices in Latvia have grown by 61.2% in 2006, more than in the any other country in the world. And that comes after a similar more than 60% increase in 2005.

I'll post some more thoughts on the Latvian real estate bubble in the next few days...

Return to normalcy

Edward Lucas has an interesting column in the Economist. I think the facts are spot-on but I would like to argue about the conclusions.

Lucas starts by contrasting our president-elect Valdis Zatlers with our outgoing president, Vaira Vike-Freiberga:

Optimists hope that Valdis Zatlers, an orthopaedic surgeon, will grow into his new job as Latvia's president. But even his doughtiest supporters doubt that he will fill the exquisite shoes of his predecessor, Vaire Vike-Freiberga, a steely-minded émigré polyglot who ushered her small Baltic country into both the European Union and NATO.

Then, he observes that this is a part of a bigger trend. The previous generation of Eastern European leaders had many big figures:

Lech Walesa of Poland and the Czech Republic's Vaclav Havel remain world famous. Poland's Aleksander Kwasniewski was widely admired abroad for his diplomatic skills. Reformist politicians such as Estonia's Mart Laar, Russia's Yegor Gaidar and Slovakia's Mikulas Dzurinda wowed the policy wonks with their zealous embrace of flat taxes and free-marketry.

Now, it's different. Only Russia's Vladimir Putin and Estonia's Toomas Hedrik Ilves qualify as "big figures", according to Lucas. As for the rest:

A lot more typical are such political leaders as Slovakia's prime minister, Robert Fico, or Hungary's Ferenc Gyurcsany: wily political operators with good business ties and a populist touch.

I think this trend is a part of Eastern Europe returning to normalcy, after the Soviet oppression and the chaos of first post-Soviet years.

Great leaders often emerge as a response to great challenges. When Vaira Vike-Freiberga came to power in 1999, Latvia had to convince the Western world that our country is a part of it. During her presidency, Latvia succeeded in that. Latvia became a member of the European Union and NATO.

The same thing happened in other Central European countries. Lech Walesa and Vaclav Havel were symbols of Poland and Czech Republic rejecting Communism and aspiring towards the same values as Western Europe. Now, the values that Walesa and Havel fought for are universally accepted in their countries. And, once something is universally accepted, there is no need for a visionary leader articulating that.

Today, the main challenge for the countries that joined European Union in 2004 is ensuring competent day-to-day management. We are not making a fundamental choice between democracy and totalitarianism, or free-market and centralized economy any more. Those choices have been made long ago.

As a result, there is not much space for visionary leaders any more. Businessmen and managers are taking their place. The main issues in the past Latvian election were: "Who is the most competent?" and "Who is the least corrupt?".

I hope this trend towards normalcy continues. I prefer to live in a world where proper enviromental standards for new housing developments are the most burning political issue, rather than in a world were Latvia has to worry about Russian military buildups. Of course, that depends on whether Russia is heading towards normalcy as well, and I am not sure of that at all...

An article on Livs/Livonians

In comments to my previous post, reader Ed points to an interesting Deutsche Welle article on Livs/Livonians, the nearly extinct indigenous ethnic group in Western Latvia.

The article says that the number of native speakers of Livonian is less than a dozen (even less than what I said in my previous post). But the younger people of Liv descent are trying to learn the language and keep it alive. I hope they succeed!

As a side note, I find it amusing that English uses the word "Livonian" for two entirely different things:

1. The indigenous ethnic group of Latvia;
2. The German knights who conquered the land of Livs/Livonians in the 13th century.

In Latvian, we distinguish the two by calling the first Livs and the second Livonians. In English, both the local people and their conquerors are Livonians! I was really surprised when I first saw that in Wikipedia three years ago.

Blue cows!

A friend from London told me he had seen an ad by Latvia tourism agency:

Two million reasons to visit Latvia
Reason #653,432: blue cows.

That started an interesting conversation. I think I managed to convince everyone that Latvia indeed has blue cows.

Latvian blue cows are farm animals, a peculiar variety of regular cows.


Traditionally, blue cows were grown by Livs, an indigenous ethnic group of Latvia which spoke a language related to Estonian and Finnish. Livs lived along the Baltic sea in the Latvian regions of Vidzeme and Kurzeme (Courland). An old legend says that blue cows used to live in the sea and would come out briefly before the sunrise to graze on the seaside grass. Then, once upon a time, The Mother of the Sea (Juras Mate) gave some of them as gifts, to families of Liv fishermen who had died in a storm.

Both Livs and blue cows became nearly extinct during the Soviet period. In case of Liv people, the Baltic Sea became the border between the Soviet Union and the West. Livs were uprooted from their fishermen villages, to make space for military. At the end of Soviet period, there were less than 100 people speaking Liv language.

Blue cows were almost completely displaced by other breeds. Less than 100 of them survived the Soviet period, too. In 1990s, Latvia, together with UN Food and Agriculture Organization, started an effort to preserve this peculiar variety of cows. As a result, blue cows can be still seen along the coast of Kurzeme (Western Latvia).

Latvian presidential election, two weeks later

The two weeks since Valdis Zatlers became the next Latvian president have been quite predictable:

• Zatlers has visited State Revenue Service, to settle the taxes on cash gifts that he, as a doctor, received from his patients. State Revenue Service has also called other doctors to pay taxes on their gifts. So far, only three other doctors have responded. Meanwhile, the public debate on appropriateness of those gifts is continuing at full speed.
• Shortly before the election, our current president Vaira Vike-Freiberga accused the ethnically-Russian party Saskanas Centrs of being disloyal to Latvia (my guess: she meant they are being funded by Putin's administration). Saskanas Centrs threatened to sue her for libel. Vike-Freiberga claimed that she has a classified information that Saskanas Centrs is disloyal and refused to make it public. We have not heard about a possible Saskanas Centrs lawsuit since then.
• The Delna organization that organized the anti-Zatlers demonstration near the Latvian parliament during the presidential vote is looking for donations. The demonstration of 500-1000 people had cost 20,000 euros to organize! Those protests are expensive...
• Someone has created an unofficial Zatlers homepage at valdiszatlers.com and offers to sell the domain to the highest bidder. The website contains three paragraphs on Zatlers and his picture. Amusingly, half of the text has been copied word-by-word from this post on my weblog.
• Social Democratic party is gathering signatures in support of a referendum that would change the Latvian constitution and make the president elected directly by people, rather than by the parliament. But now, after our parliament voted for the less popular of the two candidates two weeks ago, its chances of passing are higher than ever!
  

Index to my previous posts on the presidential election.

In the news

Latvian historian Heinrihs Strods has been denied Russian visa. He intended to visit Moscow to explore documents in Russian archives and to give a talk at a conference. Strods applied for visa several times, with support letters from the Latvian embassador to Russia and from a history institute of Russian Academy of Sciences and was repeatedly denied visa. This is a second instance when a well-known Latvian historian has been denied Russian visa. The first was Aivars Stranga in 2005.

This is quite outrageous. Apparently, in Putin's Russia, foreign historians are not allowed to do archive research unless Putin's government is sure that they'll interpret archive documents in desired way!

Found on the web

Riga Daily Photos. Some of the pictures are very nice!

Oil and the collapse of Soviet Empire

The fall of the Soviet Union in 1991 was preceded by a deep economic crisis during its last years. Until a few days ago, I wasn't sure why this crisis started in late 1980s and not earlier or later. The former Russian prime minister Yegor Gaidar says there was a good reason for that. The reason was oil.

During late 1970s and early 1980s, the oil prices were high and Soviet Union was making a lot of money by selling oil to Western nations. That allowed to buy food and other goods that the dysfunctional socialist economy of USSR could not produce in sufficient amounts. Then, in 1985, the oil prices plummeted. In half a year, they fall more than twice. And so did the oil revenues of the Soviet Union.

Soviet leader Mikhail Gorbachev desperately tried to reform the Soviet economy. But no reform, even the most perfect one, could compensate for sudden disappearance of most of oil revenues. Soviet Union had to borrow money to pay for food imports. By 1989, Western banks stopped lending money to Soviet Union, because they did not believe the country would be able to pay it back. At that point, the only loans that Soviets could get came from Western governments directly and those loans came with strings attached.

In 1990, Baltics declared independence. In January 1991, Soviet tanks attacked the TV tower in Vilnius, Lithuania. For next two weeks, Baltic states were tense. Will Soviets follow through and remove the pro-independence leadership of Baltics with military force? Nothing happened. According to Gaidar, Soviet Union had gotten the following message about Baltics:

Do as you wish, this is your country. You can choose any solution, but please forget about the $100 billion credit.

The goodwill of Mikhail Gorbachev may have played some role in Soviet Union not using military force, but the fear of not getting $100 billion credit sealed the deal.

Here is the full transcript of Gaidar's speech on this topic. He has also published a book, Gibel' Imperii: Uroki dlya sovremennoi Rossii [The Collapse of an Empire: Lessons for Modern Russia, with English translation available in two months] which I plan to read, once I get hold of it.

Oil prices are now high again and Russia is swimming in oil money, with $400 billion reserves for the case if the prices fall. Preventing Russia from using military power by threatening to withhold credits wouldn't work these days.

Posts on Latvian presidential election

This is the list of my posts on the recent presidential election in Latvia, for an easy access to them:

• Valdis Zatlers: facts, my opinion.
• Aivars Endzins: facts.
• Notes on the election campaign: March 27, March 29, opinion poll.
• Post-election thoughts: part 1, part 2, part 3.
• Estonian humour about the Latvian election.
  

Latvian presidential election, post scriptum

Some final thoughts on the presidential election:

1. Most intense election, ever. This was the most heated presidential election, since Latvia regained independence in 1991. The Latvian president is chosen by the parliament and, in previous 4 elections, people did not even try to influence the parliament. As a result, we got two presidents: Guntis Ulmanis (in 1993) and Vaira Vike-Freiberga (in 1999) who would not have won a popular vote at the time when they were first elected. (Vike-Freiberga eventually became very popular. But, when she was first elected, most Latvians only vaguely knew who she was.) And hardly anyone was objecting to that.
   
   This time was different. We had, for the first time, TV debates between the candidates. Numerous organizations expressed their opinions on candidates. Everyone had an opinion. And a lot of people were very disappointed, when the parliament chose a less popular coalition candidate (Valdis Zatlers) over a more popular opposition candidate (Aivars Endzins).


2. Zatlers is a puzzle. Our new president, Valdis Zatlers, was a complete unknown 9 days before the election. We still don't know his positions on many issues nor how independent he would be as the president. On the positive side, people who know him as a doctor say good things about Zatlers and it seems that our outgoing president Vaira Vike-Freiberga (whose judgement I trust) preferred him over the other candidate. On the negative side, a lot of people are very concerned by the way how Zatlers became coalition's candidate and whether he was chosen for loyalty more than for competence. (And this is a very soft way to word their concerns.)
   
   I hope Zatlers turns out fine! But depending on which article I read, my expectations about Zatlers go from cautiously optimistic to extremely worried and back.


3. Zatlers is a puzzle, even to those who selected him. If someone in the ruling 4-party coalition selected Zatlers in hope they could easily manipulate him, they have made a risky choice. With non-politician candidates like him, it's difficult to predict how they will behave after becoming the president. Recent Latvian history has previous examples of non-politicians ascending to top government positions in a lightning speed, like Zatlers. More than once, these people turned out to be much more independent and strong-willed than expected.
   
   The second way how this choice could backfire on the coalition is if Zatlers turns into a PR disaster that keeps saying the wrong things. In this case, they'll be stuck with him for the next 4 years and that will certainly affect the next parliamentary election. Again, if they had chosen someone who was a public figure before, it would be predictable how he will behave in the spotlight of the media. With Zatlers, it's not.

And the winner of Latvian presidential election is?

On his blog, Marko Mihkelson, an Estonian politician, says that the true winner is... Toomas Hendrik Ilves, the president of Estonia. Quote:

Now we can safely say that, after Vīķe-Freiberga leaving [the post of the Latvian president], Toomas Hendrik Ilves will become the most knowledgable leader in Baltics and, more broadly in Central and Eastern Europe. And maybe even in Scandinavia.

I essentially agree with that. I still hope our new president Zatlers turns out well. But he might not be a match for Ilves.

Mikhelson's remarks were quoted by several Latvian news websites and had an interesting effect on the readers (judging by the comments sections there). Valdis Zatlers was getting a lot of criticism. But, once the people read what Mikhelson said... they started to rally behind Zatlers. Nothing brings Latvians together as well as criticism from Estonia...