While textbook wisdom on supply and demand and interest rate fluctuations suggest that luxury housing prices should be falling, we simply did not see this in 2022.
It is probably safe to say that, in 2022, prices have remained flat. The first quarters of 2023 have not demonstrated any price depression either, although the volume of transactions remains well down in the last two and a half years, which, it is fair to say, have been a feast for developers and sellers, albeit with some rollercoasters.
I suppose there is more than one reason why prices remain stable. Firstly, there has been an increase in wealth in Lithuania and the world in recent years. Most industries have gone through periods of rapid sales and earnings growth, which has naturally been reflected in higher dividend payouts. The wealthy still have much money to spend, although according to bank analysts, accumulated deposits are disappearing fast, and, as we saw in 2008, Lithuanians, like Cypriots or Greeks, are reluctant to save until there is a crisis (2008, Lithuanians saved the most in history; apparently, when you don’t have money, you save even more). By the way, we are the least saving nation in the EU area, saving only around 2% of our income, while the Germans, for example, save steadily at around 10% of their income, regardless of the economic cycle. Secondly, many luxury properties are purchased from savings, thus without borrowing, which leads to the conclusion that the high-end sector remains somewhat immune to interest rate fluctuations. Finally, COVID-19 has led to a change in lifestyles that we believe is here to stay: people are spending more and more time at home and focusing more on their home life, even though the world has opened up.
It is important to note that supply remains shallow. In April 2023, while attending Sotheby’s International Realty’s global luxury real estate conference, I saw a recent US market survey showing that as many as 60% of Americans are not satisfied with their property purchases during the pandemic, which suggests that the secondary market should be complemented by a wider choice of properties. It would be interesting to see how satisfied Lithuanians are with their decisions during the pandemic. By the way, with record inflation and rising interest rates, it was expected in 2022 that the market in Lithuania would be replenished with more supply. Still, in the luxury and quality real estate segment, we have seen the opposite trend, where property owners waited for inflation to stabilise. It is only in Q2 2023 that we are seeing more activity among sellers.
We should not console ourselves with the fact that, according to the forecasts, by the end of this year or early 2024, the interest rate will start to fall and sales volumes will return. Looking at both Lithuania’s short history and the statistics of the United States of the 20th century, we can see that the real estate market has a certain cyclical nature, which is about 14 years. If we take the US as an example, in 1979, there were four million housing sales, which was repeated only 17 years later (1999). The new record of six million was set in 2007, which was then repeated only in 2021. Therefore, although 2024 looks like a brighter tomorrow, with the market having shifted slightly to the buyer’s side, there will be no quick return to the post-holiday fiesta soon.
Nevertheless, our industry is still busy brokering deals for its clients, many of whom are looking for opportunistic investments in a volatile market, which I think will become even more pronounced in the second half of 2023, and I guess that a possible correction in prices in the mid-segment will be unavoidable, all the more so given that the building material producers are talking about a return to normalisation of the prices of raw materials and a return to the pre-war market.
Published in “Valstybė”