During the year to March 2012, the average price of apartments in Riga, the capital, dropped by 1.5%, according to Arco Real Estate (although during the latest quarterly, residential property prices were up by 1.54%).

While nationwide, property prices still seem to be falling, it is a different story for house prices in the centre of Riga (the "Silent Centre" and Old Town), in Jurmala (Latvia's popular resort town).

In Jurmala, for example, property prices rose by around 20% to 45% in 2011, according to online newspaper, LETA. Prices of new high-end residential projects are also rising.

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There were wide variations in house prices throughout the country. By end-2011:

  • In Jurmala, which has the highest property prices in Latvia, the average price of an exclusive apartment was €4,500 per square meter (sq. m.).
  • In Riga, the capital, the average price of a standard-type apartment was €583 per sq. m.
  • Livani has the cheapest housing in Latvia, with an average price of €200 per sq. m.

Land prices were largely unchanged in 2011 compared to the previous year, according to real estate firm, Ober Haus. In the city centre, land prices range from €400 to €1,500 per sq. m.

The total number of property transactions in the "Silent Center" was five times higher in 2011 than a year earlier, according to Newsec. In the Old Town, there were eight times more transactions in 2011 than in 2010. There was an increase in foreign demand primarily driven by Russians and other citizens of former Soviet countries in the Commonwealth of Independent States, partly due to amendments to the Immigration Law in July 2011.

"For C.I.S. customers it's good," said Vestards Rozenbergs of Baltic Sotheby's International Realty, "because residency gives them access to other European countries for travel. So the buyer can go to Latvia, and then travel further to Paris or Berlin or other places."

A foreigner can receive permanent residency in Latvia (according to the Baltic Legal):

  • if a person invests LVL50,000-LVL100,000 in real estate, depending on the size of the town (LVL 100,000 - in the Riga Planning Region, Jelgava, Daugavpils, Jēkabpils, Liepāja, Rēzekne, Valmiera or Ventspils; LVL 50,000 - in other areas);
  • if a person invests at least LVL 200,000 in a Latvian credit institution in the form of subordinated capital (such transaction must be for not less than five years);
  • if a person invests LVL 25,000 in the equity capital of a company to be registered in Latvia, following this up with a payment of at least LVL 20,000 in one year's time.

Construction activity is also up. The total number of apartments completed in Latvia rose 38.8% in 2011, to about 2,662 units, having hit its lowest point in 2010. In Riga, more than 1,500 apartment units were completed in 2011, up from 350 the previous year.

Real estate prices in Latvia are projected to remain stable in the near future, according to Newsec. Demand for Latvian properties, especially in prestigious locations, is expected to remain steady in 2012.

Its those Russian speculators!

Foreigners, mostly Russians, have been reported to be snapping up tracts of land and unfinished real estate developments. With prices at one-third of peak values, residential properties in Latvia seem a bargain. Transaction volumes have been steadily rising since late 2009.

Property speculation have played a huge role in Latvia before. Surveys suggest that speculators bought around 15% to 30% of all properties during the house price boom.

From 2004 to 2007, property prices doubled, tripled or even quadrupled:

  • The national average price of dwellings in Latvia rose 311% (228% in real terms) from LVL148 (€210) per sq. m. in 2004 to LVL862 (€529) per sq. m. in 2007, according to the Central Statistical Bureau (CSB).
  • In Riga average prices rose 267% (193% in inflation-adjusted terms) from LVL229 to LVL841 per sq. m. (from €325 to €1,193) over the same period.
  • All regions registered remarkable price increases. The average property price rose by around 300% (220% in real terms) from 2004 to 2007 in the regions of Vidzeme and Kurzeme and Zemgale.
  • The average dwelling price rose least in the Latgale region south-eastern Latvia, up 211% over the same period.

Pent-up demand

The immense house price boom was also due to a significant mismatch between supply and demand.

Before independence, more than 10,000 apartments were completed annually. After independence the number of dwelling completions dropped to below 2,000 units between 1995 and 1999, and to less than 1,000 between 2000 and 2003.

It was only in 2004 that housing construction began to pick up. Dwellings completed increased significantly to and peaked at 9,319 units in 2007.

The massive demand for properties was clear; owner occupancy has risen dramatically, from 21% in 1990 to 87% in 2006. However the sudden increase in supply flooded the market, pushing prices down.

Units started in 2006 and 2007 are still being completed. The overhang continues to pile up. New developments had practically disappeared. Yet oversupply continues to mount with dwelling completed at 8,084 in 2008 and 4,160 in 2009.

Rapid mortgage market growth

The rapid expansion of Latvia's mortgage market was a key factor, propelled by low interest rates and the entry of foreign banks. The pace of growth was amazing - housing loans outstanding expanded by almost 90% annually from 2004 to 2006. Despite early signs of trouble in 2007, the mortgage market nevertheless grew 44% during that year. Total mortgage debt rose from 2% of GDP in 2000, to 33.75% of GDP in 2007.

It was not until 2008 that mortgage market growth grinded to a halt; down to 7.3% in 2008 before contracting 4.5% in 2009. With the economy contracting faster, the ratio of housing loans still rose to 36.5% of GDP.

Rental yields

Latvia's rental market is still suffering. In the past, rapid property appreciation pushed rental yields down. In August 2009, most apartments in Riga earn yields ranging from 3.7% to 4.5% with the smallest units (around 45 sq. m.) earning the highest yield.

Apartments within the suburbs of Riga earn slightly higher yields, ranging from 4.7% to 5.9%, according to Global Property Guide data.

The recent housing glut and the precipitous drop in house prices has forced a lot of households to rent out units they originally intended to sell. But the number of potential tenants has contracted due to the economic recession.

Recent house price and rent movements point to a continued drop in rental yields. While property prices rose in Q1 2010, average rents were generally stagnant from the previous quarter, according to data from Ober-Haus.

In Q4 2009, the rents in Riga's Exclusive Centre dropped by 35% to 40% from the previous quarter. While in the Old Riga Center, rents fell by 12% to 30% within the same period.

The Latvian crisis reminisced

The Latvian crisis began with the economy expanding by an average of 8.5% from 2000 to 2007, and during this period property prices rose by almost 700%. However, inflation rose from 2.5% between 1999 and 2003, to over 10% in 2007.

By the second half of 2007, the housing bubble had burst. Demand plunged. House prices plummeted. The Latvian economy almost collapsed, with real GDP declining by 3.3% in 2008, by 17.7% in 2009, and by 0.34% in 2010.

By early 2008, the boom was over. The country's fiscal deficit was shooting up. Capital was leaving the country. Exports were falling. Domestic demand was collapsing. By 2009, Latvia was close to economic collapse. The economy shrank by about 25% from the start of the global crisis in 2008 to end-2010, making it the deepest depression recorded worldwide. Unemployment surged from 6.2% in 2007 to 19% in 2010.

Latvia's currency peg meant the Bank of Latvia could not raise interest rates to tame inflation. Instead, when the crisis hit, the authorities resorted to a scorched-earth internal devaluation: access to credit was limited, taxes raised, wages were reduced and government spending cut.

In 2008, Latvia was able to secure a €7.5 billion standby loan from a group lead by the European Union (EU) and the International Monetary Fund (IMF), coupled with rigid austerity measures. The bailout prevented total economic collapse. More than €3.3 billion of the funds were used to pay public sector wages and maintain essential services.

Impressive economic growth

After a deep recession which lasted three years (GDP -3.3% in 2008, -17.7% in 2009, and -0.34% in 2010), the Latvian economy expanded strongly in 2011, registering a real GDP growth rate of 5.5%.

The country's real GDP growth was 6.9% in the first quarter of 2012 from the same period last year, the fastest growth in the European Union. Latvia's economy may surpass the forecast 3% growth in 2012, as tax revenue has exceeded plans.

From 14% of GDP in 2009, the fiscal deficit was successfully reduced to 10% of GDP in 2010 and finally to 4% of GDP in 2011.

Latvia's recovery was mainly driven by exports and an improving business and investment climate. Exports grew by 33% in 2011. The IMF has hailed Latvia's cost-cutting efforts as a model for indebted eurozone countries as a way of averting economic meltdown.

Overall unemployment, while still unacceptably high at 16.3% in the first quarter of 2012, was up from 19% in 2010.

The Bank of Latvia (Latvijas Banka), the country's central bank, kept the benchmark refinancing rate at 3.5%, inflationary pressures having eased after the sales tax was lowered by one percentage point to 21%, in an effort to improve the country's competitiveness.

The country's overall inflation rate slowed for the ninth consecutive month to 2.2% in May 2012.

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