SEB: Estonia hit by housing price bubble

Andres Reimer
, majandusajakirjanik
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Photo: Jaanus Lensment

Estonians may enjoy consuming boom till entrepreneurs are able to produce ever more effectively, lift wages and keep unemployment rise in check, says SEB chief Allan Parik, who thinks that while sailing on thin ice in this crisis-smelling world, Estonian businessmen stand on secure foundations and have thus far managed to react correctly to changes in economic environment. Domestic consumption remains solid, unemployment is low, and entrepreneurs are showing strong competitiveness on the weak external markets. No near term solution is to be expected t the differences with Russia, and therefore it makes no sense inserting deals with them into business plans. 

-What does it say about economy when financial markets absolutely abound with money with no investment-worthy projects available?

This has been an actual topic for these past 12 months – investment activity is very low both in large and small and mid-size enterprises. Investments may only be considered satisfactory in processing industry, but the overall drop is strong.

Mostly, production capacity is sufficient at the moment and enterprises are busy making production more effective. Unemployment is low, average salary is rising. To finance the wage rise, the enterprises need to become more effective, as otherwise they would drop out of competition.

Due to the political instability in the world, investment activity will remain low as our export markets are weak.

-What is your assessment regarding the competitiveness of our enterprises?

Despite the falling demand in external markets, Estonian enterprises have been competitive. Though the volumes of export into Finland are down, Estonians have managed to add market share there. That serves to show that our enterprises are flexible and are able to adjust in hard times.

Russia’s sanctions and recession have left a deep impression; sales of Estonian products and services to Russia are down over 40 percent.

-What are our options on other near neighbourhood markets, as the Russia-related risk is probably here long term?

Due to economic hardships in Finland, lots of entrepreneurs are increasingly looking towards Sweden, and the initial results are showing. These past years, the Swedish economy has done well. Let’s hope this will help bring increased variety into exports to Sweden. As an alternative, we need to look further away – and this the entrepreneurs are already doing. As an example of that, sales are up into Germany and USA.

What is worrisome is the backsliding of industrial production these past few months. Let’s hope for a recovery in the second half of the year. Estonian economy is still being pulled along by domestic consumption, June retail was up by a tenth.

-How long can a nation of 1.3 million people boost economy by domestic consumption?

The large percentage of domestic consumption makes one wonder how sustainable is the economy. On the other hand, this forces entrepreneurs into innovation and requires enhanced effectiveness in production. That’s the only way to pay the relatively high average wages and keep unemployment low. These two, however, will determine whether domestic consumption can continue in the same scope. Despite the relatively good competitiveness of Estonian entrepreneurs as compared to neighbours, there is still room for production growth in Estonia and the wage pressure favours that.

Thus, if the competitiveness of our enterprises is strong enough, consumption may continue to increase. When they are no longer competitive enough, lay-offs are the order of the day, as has already happened in some sectors of the economy.

The balance is fragile, but as long as we are able to value innovation and effectiveness, we will do well.

-Which are Estonia’s most endangered sectors of industry?

The area worst hit is agriculture – for the very sanctions by Russia. Now, the swine fever hit on top of that. In agriculture, there have been cases of loans having to be restructured. But, for the most part, the entrepreneurs have taken the right steps – for instance, laying people off and altering profiles – to remain solvent.

The other example is tourism industry, as there are fewer Russian tourists and that affects the accommodation establishments. Now, in the summer peak season, the occupancy is good, but it is not known what the fall and winter will be like.

Several sectors of processing industry, especially timber industry, have done surprisingly well. Ergo, our competitiveness in the direction of Scandinavia, for instance, is very good and there is nothing wrong fundamentally. Whatever is in our power, we have managed to manage it well.  

- During the Russian crisis, the Finns are feeling gloomy about their economy. Thankfully, the Swedes are not linked to Russia as explicitly. How would you assess the ability of Scandinavia to remain a strong partner for Estonia?

Sweden has strengthened its position as our top important exports partner, and though doubts have been expressed regarding the sustainability of the increases of their consumption growth, the Swedish economy has thus far remained solid. As for the Finnish economy, the predictions are about slow improvement near-term, which for us is good news indeed.

Russia’s share in exports fell from ten percent to six, which is not as bad as could have been feared. Lots of entrepreneurs still keep looking towards Russia with hopes that things will improve. However, we do not dare to advise that they tie themselves too much to a Russia that has shown itself a rather instable partner. Only overcapacity of production might be planned as sales in that direction.

We are not only affected by the sanctions related to Russia, but also by the conflict between the ineffective Southern Europe and the effective Northern Europe. The growth capacity of global economy is not too clear. In addition to the European trouble spot Greece, we are also affected by the steam being let out of Chinese stock market.

-What would be the effect in Estonia if Chinese economy fell sharply?

The Chinese share in our economy is small, and the direct impact therefore not significant. But the effect comes through the instability in money and capital market which serves to deepen the overall instability in the world.

-How great, do you think, is the threat of a burnout on Estonian real estate market as the current building of apartments is being compared to the very establishment of the «mountains» [Mustamäe, Lasnamäe etc, the names of large apartment areas ending with the word mountain – edit] in Tallinn in the 1970ies and 1980ies?

I do not see strong oversupply at the moment, but the prices are another matter: apartment prices have risen to the pre-crisis level of 2007–2008.

In six months, home loans have risen close to four percent year-on-year. This is nowhere near the boom-time and pre-crisis growth which reached 20–30 percent. On the other hand, since the beginning of 2014 people’s savings have been in a stable rise of eight percent a year, meaning that in addition to spending, Estonians have become good at saving.

Thankfully, it seems like the people know how to count money and are asking themselves what would be the sensible price for a home. Therefore, there is no supply bubble, but rather there is a price bubble. I believe that in near future increases of loans will be slowed down by high home prices – the market will react to the price bubble.

-How do you plan to alter SEB’s bank branches and ATM’s network?

We are monitoring the consumer habits of customers. The digital age triggered by banks and communication companies fifteen years ago has reached the masses and the number of clients using banking services at branch has fallen so low that the role of the latter has changed. Formerly, a place for putting cash on account or withdrawing it, this is now a place for counselling and advice. The branches must remain, but the role is significantly altered.

-Does that mean that the staff at SEB branches must not worry for their jobs?

At the moment it seems to me that the SEB branches network is optimal, as every county has strong centres.

-The upset is always strong where an ATM is removed from some small place. How do you view the Finnish example of all Estonian banks using shared ATMs?

Some think the unified network would improve accessibility to cash, others think it would take cash farther from consumers. SEB believes it would improve availability of cash, and help install ATMs in more places instead of the machines of various banks clustered around shopping centres like today. We are willing to put the topic back on the agenda of the other banks and the public would come along.

Meanwhile, I believe that the ATM cult is about over in Estonia. There are so many payment options to choose from that the share of cash will be in constant decline. Cash will always be, but its importance will shrink and its role will change. While we currently do every second purchase by cash, in the Nordics it is every fifth. I believe that the importance of cash in everyday life will shrink just as that of bank branches, as there are more comfortable options on offer.

-Which weaknesses of large banks could be used by new small cooperative credit banks?

I believe that the banking market is in for some interesting times. The laws are pressurising banks to focus their operations, to only deal with the more profitable side of banking. Small enterprises have entered the market, with more to come, offering only one or two banking services. Sure, every company seeks to offer first class solutions, but they do not see the customer as a whole; but the latter is a large advantage for SEB as a universal bank.

We are there for the individual when he obtains his student card, applies for the first loan, and later on wants to start a business. We are there while he seeks to grow the company and when he wants to turn it into cash – at every stage of life. This is a value that the newcomers will have a hard time copying, if not altogether unable. Seeing the client as a whole helps us to help him when he has setbacks, as we know what he is capable for.

Thus I feel confident and I welcome the competition on the banking market. If there are weaknesses in our services, we learn about them quickly having a feedback collection system. In banking, competition is so strong then no-one can afford weaknesses – not even the newcomers.

Our aim is to give customers good advice and offer the best solution. At times, the best solution is over our head. For instance, from a certain sum upwards, we advise that large companies add variety to their financing portfolio, involving part of the needed cash straight from international money and capital markets. For that, we have teams able to counsel and support the entrepreneurs. There is an abundance of money on the market at the moment, seeking for its place.