Signs of real estate crash in Latvia

Latvian real estate prices have been falling for one year by now. Apartments are now cheaper by 20-30%. And, recently, we've seen some new developments:

• Parex Asset Management, one of leading financial companies in Latvia, has established 'Baltic Distressed Property fund'. The fund plans to raise 25 mln euros to buy real estate from owners in financial trouble.


• Edgars Šīns, the head of Latio real estate, predicts possible foreclosures for 40,000 households. That's 20% of all households with mortgages. Only 17% households in Latvia have mortgages, so, that would be 3.4% of all households - but that is still a big numbers. Šīns has called for a massive government intervention to prevent a possible collapse in real estate.
  
  The government thinks Šīns is exaggerating the situation. In any case, a government bailout could be very unpopular with general Latvian public. (Since only the wealthiest 17% have mortages in Latvia, the remaining 83% might not like their money going into a bailout of people who are richer than them. Or even a bailout of people who used to be richer than them before the real estate started falling.) Others are questioning Šīns math as well and it's plausible he has inflated the number of possible bankrupcies by a factor of 2 or 3.
  

Two alarming news stories

In today's news:
- Lauma, the main Latvian lingerie producer, plans to lay off 100 workers and move the manufacturing to cheaper countries (Russia or Ukraine);
- Laima, the main Latvian chocolate producer, may temporarily stop production after the consumers have cut back on the more expensive sweets. (The company denied the report.)

Both companies have been around for very long time and have succesfully weathered the transition from Soviet Union to the market economy. Just like the electrical equipment manufacturer Rebir which closed earlier this year.

So, it's quite alarming sequence of news stories. Statistically, though, the March 2008 unemployment rate was at 4.9%, just barely above the all time-low of 4.8% reached in November 2007. The next months will show whether the news stories represent a change of the trend or not.

Referendum on early election moves ahead

Yesterday was the last day when one could sign for a referendum on a constitutional amendment that would allow to dissolve the parliament and hold early elections via (another) referendum. About 225,000 people, or 15% of eligible voters signed for the referendum. Wow!

So, the necessary signatures have been gathered and we will have the referendum in a few months. The government now has every reason to be afraid. This is a referendum on a constitutional principle but most of people did not sign for a abstract right to dissolve the parliament. Rather, they signed up because they don't like the current parliament.

The passage of the constitutional amendment is uncertain. The Latvian constitution puts a very high bar for constitutional referendums, by requiring more than 50% of eligible voters to vote "yes". And, for last few parliamentary elections, the turnout has been 60-70% of eligible voters and not all of those hate the current coalition.

Still, there is a chance it will pass and I'm now wondering if the coalition will try to preempt that. There is another version of the amendment circulating around, which also introduces referenda on early elections but sets stricter requirements on the number of votes to dissolve the parliament. The coalition could pass that in parliament, hoping that that will satisfy some of the unhappy voters.

This play was done once before, for 1999 retirement benefits referendum, when the parliament appeased the voters by passing a weaker version of referendum proposal. Some voters still showed up for the actual referendum to vote for the stronger proposal. But there were not enough of them for the proposal to pass.

IMF predicts six lean years for Latvia

They expect Latvian economic growth to slow down from 10.2% in 2007 to 3.6% in 2008 and then 0.45% in 2009 and 0.28% in 2010. By 2013, the economic growth will rebound but only to 3.0%/year.

So, the cumulative growth in six years from 2008 to 2013 will be around the same as the one year growth in 2007. This is the most negative economic forecast on Latvia I've seen so far but, sadly, it's plausible.

The IMF report is here, LETA news summary is here. Both Lithuania and Estonia are expected to experience sharp slowdowns as well, but not as sharp as Latvia.

UPDATE (11/04): All/almost all Latvian financial experts think that the forecast is overly pessimistic. Given that we are already in recession in terms of quarter-on-quarter growth, I find 3.6%/year in 2008 quite plausible. (I would not even be surprised if we do even worse in 2008.) I do hope (and think) that we will rebound faster than the IMF estimate for 2010-2013, though.

Financial Times article on Latvia

A commenter on my previous post points to a Financial Times article on Latvian housing market (which does a good job surveying the situation) and asks me to comment on this:

Consequently property prices have fallen by a quarter since last spring but asset quality remains good because only 17 per cent of households – typically the wealthiest – have mortgages, according to Hansabanka.

I think Hansabanka's argument is flawed. What matters is the ratio between the mortgages and the income. Latvia's mortgage debt-to-GDP ratio is around 34%. Combine that with only 17% of households having mortgages and what you get is 17% of households having quite a lot of debt compared to their incomes. Even if those are mostly the wealthiest 17% of people.

There's no sign of large scale problems with Latvian mortgages at the moment, but Hansabanka's claim why problems should not happen looks flawed to me.