Eesti Pank battling a boom

Photo: Peeter Langovits

«Compared to the period six months back, the real estate market has clearly calmed down,» Estonian central bank vice president Madis Müller told a press conference yesterday. With president of the bank Ardo Hansson, they introduced home loan limitations to enter into force starting next year. The limits are three.

The limit of loan guarantee i.e. the home purchased is 85 percent, with loans linked to Kredex surety it may go up to 90 percent. Meaning: loan taker must pay at least 15 percent of home bought.

«We don’t want to see a situation where the banks cover the entire amount,» explained Mr Hansson.

The second condition is that loan payments may not exceed 50 percent of net income of payer; as the third condition, home loan maximum deadline shall be 30 years.

Exceptions are allowed – up to 15 percent of loan volume granted during a month may be issued at conditions exceeding the limits.

The requirements will apply to all banks operating in Estonia.

Madis Müller said the banks have laid down own inner rules for loan conditions and these rather nicely correspond to what the central bank shall prescribe. «These conditions should not affect behaviour of banks today, neither substantially affect conditions of home loans and the issuance thereof,» thinks Mr Müller.

«Actually, nothing much will remarkably change,» commented real estate company Pindi Kinnisvara board member Peep Sooman. «Those with excellent paying ability and income are still able to assume loans at zero own financing, if they have an extra guarantee,» he added.

According to Mr Sooman, 40 years home loans did exist for a while, but as compared to the 30 year ones interest costs then rose so high it was hardly ever considered an option. «The more so that 40 year loans are for some select few as they have to still be working age people when the contract expires,» assured Mr Sooman.

According to central bank president Ardo Hansson, the situation currently favours rise of real estate prices. «Real incomes are going up, interest rates are low, but what we see as a positive: the banks are not heating up the real estate market,» said Mr Hansson. «Home loans volume has not substantially increased,» he added and went on to underline that the real estate market is indeed a source of risk, but during these past months the situation has improved.

The real estate market has been regulated by cyclicalness of the economy, as the earlier price rise has taken the prices too high. According to Madis Müller, buying a home has become less affordable for people.

«We see we do not need to do anything actively right now to affect activities of the banks, but we all remember the results of the last boom – not in Estonia only, but also in Europe and the entire world,» added Mr Hansson.

In other countries also, additional instruments are being invented to avoid a boom. Since May, utilization of such instruments is also within the capacity of the central bank (the so-called micro financial supervision measures), the first case now being the establishing of above limits.

Peep Sooman said we all are currently living under uniform conditions – which is good and serves to keep the market more or less balanced.

«But should an illusory wellbeing be created, then it is no longer possible to turn softer that the central bank regulations and the banks will not be able to heat up the market too much. Which is very nice, actually,» said Mr Sooman. «I do not blame the banks in the last boom at all, but obviously people lost the sense of reality and the banks did not do anything to help maintain stability.»