News: Debt concern over Estonia property boom

Fri, 30 Mar 07

Estonians taking advantage of a booming property market may suffer as a result of inevitable future rises in interest rates, reports the BBC...

Ever since banks started offering low interest mortgages about five years ago, the growth of the property market in Estonia has been dramatic. Prices in the capital Tallinn went up 50% in the last year, and the country is in the grip of a building boom.

The boom is worrying some people, not least since household debt in Estonia has risen by more than 50% per year in the past three years.

At the national Bank of Estonia, Sven Meimer, the head of the Financial Stability department, says it is impossible to predict how people will cope with paying the money back if and when the economic situation changes.

"If things keep going well, it's likely nothing will happen”.  He added: “that's what the bank forecasts for the next two years. Estonians, however, don't know what it means to have a loan for 30 years, and when interest rates rise rapidly, what it means to pay back more than you had planned. We can't tell how they'll react."

Strong economy

Few share such concerns. Debt levels have a long way to go before they reach those of wealthier European countries, and Estonians are feeling optimistic.

True, Estonia remains one of the poorest countries in the European Union, with incomes half the average, but it also has one of the Union's fastest growing economies.

For a while, the country was even hoping to be among the first new member states to adopt the euro in January 2007, though that plan has now been delayed until 2008 after Estonia recently admitted that it will not be able to keep inflation within the limits set for eurozone entrance.

Economic growth continues

Fifteen years after regaining independence from the Soviet Union, Estonians have wholeheartedly embraced the transformation to a market economy, earning their country recognition as the leader of the ‘Baltic Tigers'.

After the difficult transitional years of the 1990s, when the country undertook major restructuring and weathered the Russian economic crisis, Estonia's growth really took off.

Last year the country's economy grew by 9.6% and it is not about to slow down. The National Bank of Estonia predicts that the economy will grow by more than 8% this year and by more than 7% in 2007.

Soaring house prices

While growth is rapid throughout the economy, it is fastest in the property market. Ordinary Estonians, now getting the chance to buy a home, are jumping at it - making house prices rise faster than in any other country in Europe.

Having already lived through enormous changes, the enthusiasm with which people are buying property reflects their confidence that whatever may come, they'll be able to weather the storm.

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