Monday, April 28, 2008

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.

1 comment:

Snork said...

I think any fall in real estate prices can only hurt borrowers if they intend to sell the property. Otherwise, their ability to pay back the loan should only depend on the purchase cost of the property (and on their income, of course).

On the other hand, companies such as Latio are poised to lose from a fall in demand for real estate, compared to the huge profits they were making in the last few years. So it comes as no surprise that Mr Šīns wants the government to intervene.