Baltic states housing bubble

The Baltic states housing bubble is an economic bubble involving major cities in Estonia, Latvia and Lithuania. The Baltic States had enjoyed a relatively strong economic growth between 2000 and 2006, and the real estate sectors had performed well since 2000. In fact, in between 2005Q1 and 2007Q1, the official house price index for Estonia, Latvia and Lithuania recorded a sharp jump of 104.6%, 134.3% and 106.7%. By comparison, the official house price index for Euro Area increased by 11.8% for a similar time period.

The crisis eventually hit in 2007 due to the financial crisis of 2007-08 resulting in fragile Baltic economies. The housing price correction had begun in Estonia by mid-2007 followed by Latvia and Lithuania in mid-2008. Subsequently, Latvia and Estonia experienced recession by first half of 2008, while Lithuania had experienced a slowdown in its economy by the first half of 2008. The situation worsened after the September 2008 global financial crash, sending the entire region into a full-blown recession. All three countries experienced recession by 2009.

The increase of credit supply to private sectors was largely to be blamed for the housing bubble in the Baltic states, due to the availability of financing from foreign lenders (predominantly Scandinavian banks). Domestic banks (notably Parex Bank, a national bank in Latvia) were largely reliant on rolling their foreign loans (denominated in Euro) with large exposure to the real estate sector. The condition was further worsened due to the absence of loan-to-value ratio as well as negative real interest rate which spurred speculators to drive the market housing demand higher. The credit supply was then deteriorated at the peak of the boom as both foreign and domestic banks tightened lending standards due to the higher credit risk in the region. Subsequently, real estate market were dragged down, further deteriorate credit quality, forced banks to further tighten lending standards.

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