Latvian Real-Estate Market

Bloomberg Today


Latvian Real-Estate Market, Lending Are Slowing, Premier Says

Latvian economic growth, the fastest in the European Union, will slow as cheap credit dries up and the burgeoning real-estate market cools, Prime Minister Aigars Kalvitis said.

Mortgage lending grew an annual 77 percent in May, compared with 89 percent in January, central bank governor Ilmars Rimsevics said on July 6, and apartment prices declined in Riga for the first time since March 2005.

The former Soviet republic, which joined the European Union in 2004, is struggling to balance the desire for fast economic growth to bring living standards up to western European levels with the need to control the expansion. Soaring wage growth, accelerating inflation and a ballooning current-account gap have prompted credit evaluators to warn of a possible crash.

``We see the real estate market slowing down, fewer deals going on every week,'' Kalvitis said in an interview in the capital Riga yesterday. ``After a couple of months we will see the first results regarding inflation.''

The economy grew a record 11.2 percent in the first quarter of the year, compared with 3 percent for the 13 nations that share the euro. Standard & Poor's cut Latvia's rating to BBB+ on May 17 from A-.

To combat the imbalances that are emerging from the current expansion, the government passed measures in March to slow credit growth, slow inflation, and balance the budget.

Record Inflation

The annual inflation rate has averaged 6 percent in the last three years. It reached 8.8 percent in June, the highest in the EU and four times higher than the euro-zone average.

``We are at the peak in inflation right now,'' said Zigurds Vaikulis, the chief economist at Parex Asset Management, in a telephone interview. ``We can stay here for quite a long time.''

Measures to slow lending have already begun to work, Kalvitis said, judging by the decline in mortgage growth.

The average price per square meter for apartments fell to 1,709 euros ($3,343) in May from 1,720 euros in April, though the May figure more than double the 797 euros per square meter in May 2005.

Kalvitis said that growth will allow the government to end the year with a budget surplus this year. The government plans for a deficit of 1.4 percent of gross domestic product.

``This situation allows us to have a surplus budget, not maybe 2 percent, but 0.5 percent is possible,'' he said.

The International Monetary Fund said May on 4 that Latvia should cut spending further and plan for a surplus of 2.25 percent this year, and a 4 percent surplus next year.

`Good for Latvia'

A more-sustainable, long-term economic growth rate for the nation of 2.3 million people is about 7 percent, Kalvitis said.

``That would be very good for Latvia,'' he said.

The current-account deficit, which was fed by quick growth and cheap credit, narrowed in the first quarter to 25.7 percent of GDP in the first quarter from 26.3 percent of GDP in the fourth quarter.

Still, he acknowledged it is a ``serious problem'' and the Economy Ministry is working on a plan to narrow the deficit.

``But it's not an easy task,'' Kalvitis.

The positive effect of warnings by credit evaluators such as Standard & Poor's is that it may cause lenders to be more careful about easy credit and prompting them to tighten access.

``It's a good signal to the private sector not to lend so much money,'' he said, adding that the government will work to bring its credit rating back up.

``We will do our best to improve our image,'' he said. ``We will try with all our effort.''