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Looking at the longer history of Europe, real estate is still cool among private persons and indisputably one of the most popular investments among other important choices, ranking above cars, for example. Of course, nothing can beat a smartphone this day and age, but they are not durable goods and need to be frequently replaced. If you’re not on Facebook, WhatsApp or Instagram, then you don’t exist, right? However, if you don’t own a home or a car, you can always rent one, but that doesn’t really work with smartphones yet. Soon, we will be able to use self-driving cars, which means that new, flexible options will make car rental and ride-sharing services even more popular. A good public transport network and increasing parking fees also reduce the motivation to own a car when living in a city, as its value decreases by more than 10% the minute it leaves the showroom. Real estate, however, is likely to remain an attractive traditional investment for some time, as people prefer owning it to renting if they can afford it.
Why is real estate so attractive?
When we try to highlight the two main reasons why owning real estate continues to be more popular in Europe than renting, the first is the simple human desire to have the security to design your own living environment as you wish and enjoy it. An owner has more freedom and motivation to do this than a tenant.
The second factor is people’s natural desire to actually own something that remains valuable and gives extra security to the family, as the name ‘real estate’ itself suggests. Rent is seen as a monthly expense whilst real estate is an investment into the future. In other words, real estate allows people to accumulate savings. Of course, this approach can be challenged because not all real estate investments generate income for the owner or maintain their value. For example, grand and beautiful manors because in their case people also buy historical value and prestige, which outweigh all fixed costs.
Real estate needs no advertising because of the current negative euro base rates.
The facts speak for themselves. Namely, attractive real estate in a good location has managed to maintain its value relatively well in the long term. However, it must be said that real estate is a risky asset class by nature, as the prices may fluctuate as much as equity prices from year to year. There is real estate in large cities with prices that continue to skyrocket and fading stars that generate no interest even if the prices are close to zero.
The claim that real estate as an asset class is successful in maintaining its value for the longer term tends to be a rule in Europe rather than an exception. Namely, since 2006 the prices of residential properties (Eurostat House Price Index) in most European countries are even higher than they were before the peak that preceded the crisis.
The price indexes of the Baltic tigers Estonia, Latvia and Lithuania are about 40-60% higher than they were in early 2006. Considering a faster increase in income, it could be expected that the growth of real estate prices in the Baltic States has been faster than in the eurozone (an increase of about 20%). However, the price increase in the selected period is clearly lagging behind the leaders of real estate price increase Sweden and Norway (a 100% increase from Q1 2006 to Q4 2018).
Whilst the prices in Estonia are already marginally higher than the absolute peak before the crisis (in late 2007), conquering the former summit will not take long in Latvia and Lithuania, either, considering the speed of the present price increase. People are much better equipped for it now, as economic development and loan increases are more balanced and income somewhat higher. A price increase that is stable and moderate is always better from the viewpoint of the welfare of citizens than one that is jumpy and exceeds the increase in income.
Responsible borrowing must be emphasised in addition to the attractiveness of real estate
It’s clear that the temptation to acquire real estate will keep increasing as interest rates stay low and borrowing power increases, which is supported by an increase in wages that exceeds the price increase. However, even in light of all this we cannot ignore the risks, as the acquisition of real estate is a long-term loan commitment that must be serviced even in bad times. Over-borrowing may not mean immediate problems in the repayment of loans, but it may cause unwanted stress and the need to cut costs in other areas important to the family (e.g. children’s hobbies and education).
Responsible borrowing must be the objective of the lender and the investor alike. The painful lessons of the past economic crisis are becoming a thing of the past, so it’s important to pass on the experience of older people to the new generations.
This does not mean that young families should give up their plans to acquire new homes that improve their lives and security for as long as they’ve managed to save enough money, but it’s important that they assess the financial capacity objectively so that the investments they make in their future are likely to be successful and bring them joy. Common sense says that debts must be repaid, so maybe you shouldn’t go for the shiniest and most expensive property or car the first time you buy. Of course, people should have the freedom of choice and banks are obliged to reject loan applications that are clearly too optimistic. However, all this serves one goal – customer satisfaction always comes first.
The citizens of the Baltic States believe in real estate and this has justified itself, as the majority of the increase in the value of assets in Europe has occurred in real estate. According to different sources, the rate of home ownership in Estonia, Latvia and Lithuania is around 80%, which is 20% more than the average in the eurozone. As prosperity increases, the other financial assets of families (incl. retirement savings) can also grow next to real estate, which depends on the local economy. Financial assets of global reach supplement real estate in Europe and help people spread their investment risks away from the home market as well.