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News: Latvian property on the rack?

Wed, 02 May 07

It’s a confusing and contradictory time in Latvia’s property market at the moment, claims Amberland...

Property prices in Latvia cannot keep going up!

And in case you have yet to cure your addiction to investment property returns in Latvia, we’ve a whole host of new facts, data, figures and statistics to prove to you that if you really do want to be in this particular market you need to be in it for the long term.

For a start construction costs in Latvia rose by a startling 30% in just the first quarter of 2007 alone – this in spite of the fact that the government in Latvia introduced some serious inflation busting plans earlier this year. 

Then you have economists warning that despite what the government wants in terms of inflation reduction, they could be about to fuel the construction and inflation fire even further by allowing the development of three ambitious construction projects all at the same time...

The 30% rise in construction costs in the first three months of 2007 is unsustainable – that’s a fact.  Wages shot up by almost 53%, materials went up by over 18% and the cost of building residential real estate in Latvia rose by 29.7% year on year to March 2007. 

Wage rise ‘catastrophic’

The president of leading local construction company Skonto Buve summed it up when he said that the wage rise was “catastrophic” and the entire state of inflation in the construction industry was “incomprehensible.” Local developers are sweating it out and are concerned that there will come a time when they cannot afford to finance future developments.

Of course, the government is keen to put the breaks on the rise and rise of the construction industry to ease inflation and one of the ways they are proposing to do this is through the restriction of loans to construction companies - so that could all work out for the best!

But at the moment EU funding is being blamed – at least in part - for the boom in inflation in the construction industry.  EU funding has poured in to several key construction and development projects and now this money is running out as the projects come to completion, the industry could be about to witness a significant slow down and balancing out...

However, directly contradicting this standpoint is the evidence that if the Culture Ministry and the government have their way and three significant local building projects get the green light, 428 million euros will need to be poured into the construction industry from somewhere and this will create even more inflation and result in higher construction prices being passed on to the consumer reducing affordability and reducing the overall appeal of property in Latvia.

Long term approach ‘best’

It’s a confusing and contradictory time in Latvia’s property market at the moment...on the one hand you have undeniable evidence that property prices rose by upwards of 66% on the back of a booming economy, heavy consumer demand and cheap and easy finance in Riga last year - and naturally, this draws property investor’s keen interest.  But on the other hand you have the likes of economist Uldis Osis suggesting that banks may begin to restrict financing at a time when affordability is already tight.

The bottom line is probably this – if you like Latvia and you’re addicted to its investment property returns you’re going to need to take a long term approach towards future profitability. 

For one thing the government has pushed through tax plans that will see capital gains taxed on the resale of real estate held for less than three years, and for another thing, if affordability gets much tighter there will be less of a resale audience for any investor looking to sell up anyway.  One plus point though – if you have buy to let real estate, if fewer people can afford to buy you’ll have a growing

 

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