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Last Updated: Friday, 12 May 2006, 01:38 GMT 02:38 UK
Debt concerns at Estonia property boom
By Laura Sheeter
BBC News reporter in Tallinn, Estonia

SEB in Tallinn
An influx of foreign firms has helped spark a building boom

"Please ignore the boxes, I haven't unpacked everything yet," says Natalia Omulchunka as she opens the door to her flat.

"I'm still deciding what to do with the main room, but it's a bit complicated because, well, I'm married to the bank."

Ms Omulchunka's new home is a sunny flat in a renovated 1930s block in the heart of Tallinn.

She fell in love with it the first time she saw it in mid-January, and within two weeks the flat was hers.

Twenty-three years old and a few months into her first ever job, Ms Omulchunka was able to arrange a mortgage in less than a month.

"I didn't have a problem," she says. "It all went very quickly."

Modern desires

Quick sales are not unusual in Estonia. Most of them take between two weeks and a month.

Ever since banks started offering low interest mortgages about five years ago, the growth of the property market has been dramatic.

Prices in the capital Tallinn went up 50% in the last year, and the country is in the grip of a building boom.

Ms Omulchunka may have found what she wanted in a renovated building, but most Estonians want to live somewhere new.

For estate agents like Taivi Lippmaa, it is perfectly understandable.

"You have to think about the conditions we lived in for the past fifty years under the Soviet system," she says.

"People want to live in better, newer and more modern places. They're just taking a loan for everything, mortgaging everything to buy a new place to live."

Dangerous debt levels?

The rush to fulfil that desire is transforming Tallinn.

Tallinn skyline
Property prices in Tallinn have been soaring

From the twenty-first floor of an unfinished block of flats in the city centre, Ardi Lossman, whose firm is building this block, points to other building sites across town.

You can see cranes in every direction, and in the glass walls of new tower blocks, the reflection of the turrets of Tallinn's medieval Old Town.

Yet, demand vastly outstrips supply.

"If you put up a sign saying there will be a new building, the next day there's a ring of people ready to sign a contract, without knowing the plans, the design or anything."

The boom is worrying some people, not least since household debt in Estonia has risen by more than 50% per year in the past three years.

At the national Bank of Estonia, Sven Meimer, the head of the Financial Stability department, says it is impossible to predict how people will cope with paying the money back if and when the economic situation changes.

"If things keep going well it's likely nothing will happen," he says, and indeed that's what the bank forecasts for the next two years.

"But Estonians don't know what it means to have a loan for 30 years, and when interest rates rise rapidly, what it means to pay back more than you had planned.

"We can't tell how they'll react."

Strong economy

Few share such concerns.

Debt levels have a long way to go before they reach those of wealthier European countries, and Estonians are feeling optimistic.

True, Estonia remains one of the poorest countries in the European Union, with incomes half the average.

But it also has one of the Union's fastest growing economies.

For a while, the country was even hoping to be among the first new member states to adopt the euro in January 2007, though that plan has now been delayed until 2008 after Estonia recently admitted that it will not be able to keep inflation within the limits set for eurozone entrance.

Educated workforce

Fifteen years after regaining independence from the Soviet Union, Estonians have wholeheartedly embraced the transformation to a market economy, earning their country recognition as the leader of the 'Baltic Tigers'.

Building under construction in Tallinn
Building is one thing, paying for it another, warn sceptics

After the difficult transitional years of the 1990s, when the country undertook major restructuring and weathered the Russian economic crisis, Estonia's growth really took off.

Last year the country's economy grew by 9.6% and it is not about to slow down.

The National Bank of Estonia predicts that the economy will grow by more than 8% this year, and by more than 7% in 2007.

Some economists say the growth's roots can be found in Estonia's history.

When it regained independence from the USSR, Estonia already had the highest income per head of any former Soviet republic, with one of the best educated workforces.

Those relative advantages meant that the new nation was ready to make the most of its closeness, both physically and culturally, to wealthy neighbours Finland and the other Nordic states.

Consequently, Estonia was one of the first post-Soviet countries to receive significant foreign investment.

Finnish high-tech firms, in particular, developing new mobile phones and other equipment, turned to Estonians to actually produce them.

And sitting as it does between Russia and Western Europe, the country flourished on international trade, a key source of income in the 1990s.

Soaring house prices

Trade, while still important, is less crucial now, as Estonia has developed other local industries.

Among the main ones are forestry and timber products, and the Estonian chemicals industry, which is growing again after collapsing with the dismantling of a former major customer, the Soviet military.

While growth is rapid throughout the economy, it is fastest in the property market.

Ordinary Estonians, now getting the chance to buy a home, are jumping at it - making house prices rise faster than in any other country in Europe.

Having already lived through enormous changes, the enthusiasm with which people are buying property reflects their confidence that whatever may come, they'll be able to weather the storm.

Country profile: Estonia
30 Apr 06 |  Country profiles

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