Housing loans now cheaper in Estonia than in Finland

Estonian banks compete fiercely with margins

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By Heikki Arola in Tallinn
     
      Banks are quite eager to grant housing loans to their customers in Finland, but the market is even more busy on the other side of the Gulf of Finland - in Estonia and the other Baltic States.
      The four Estonian banks are battling fiercely for housing loan customers. The competition has led to a downward spiral in margins, which have now fallen below the Finnish level on average.
      In Finland, the average margin on a new housing loan is around 0.6 percent, but in Estonia, margins have been cut to 0.5 percent.
     
The competition between Estonian banks is also more extravagant by nature than in Finland, where regulations and old gentleman’s customs limit advertising and the style of making offers. Such limitations are unheard of in Estonia.
      A full round of housing credit providers matching each others’ offers was witnessed in early March when Eesti Ühispank first announced a margin offer, and the three other banks followed suit with their own specials.
      Ühispank offered a loan indexed to the six-month Euribor rate with a margin of 0.6 percent. Hansapank immediately countered the move by offering loans with zero margins up to the end of this year. The bank did not indicate what kind of margin its loans would carry after the offer period is over.
     
The Estonian arm of Nordea answered a couple of days later by offering its customers a margin of 0.5 percent. Sampo was the last to jump in, promising to offer better terms "almost always" when a customer arrives at a Sampo branch equipped with a housing loan offer from another bank.
      Härmo Värk, the head of Estonia’s Sampo Pank, explains that "almost always" means that Sampo will give customers a better offer than competitors "in 99 percent of the cases". In order to receive the offer, the customer must transfer all of his or her banking business, and preferably insurance policies as well, to the Sampo group.
     
The tough battle for home buyers shows that Estonian banks are in possession of plenty of money, and they are willing to distribute it to households even though the boom in the real estate market has lasted for many years already. Many have warned that the growth cannot go on forever.
      Krister Rosenström, the head of Nordea in Estonia, says that the question is under constant review at Nordea. The profitability figures of the banks from the first quarter of the year indicate that the fight for households is eating away at earnings.
      On the other hand, Rosenström is confident that the GDP will continue to grow in line with forecasts, or at an annual rate of around six percent, over the next few years.
      In such circumstances, the banking market grows by some 30–40 percent each year, so this fact alone offers banks possibilities for growth despite their competition among themselves.
     
It is evident when walking along the streets of Tallinn in particular that new homes are being built at a rapid rate in Estonia. The price level of new apartments has risen by around twenty percent annually over the past few years.
      Rosenström observes that there is also some speculative trading present, and many Estonian private citizens have begun to invest in real estate.
      Apartments are normally reserved during the construction phase, but the buyer is not always the end-user, but an investor seeking an increase in value. This practise accelerates the rising price trend.
     
According to Rosenström, one third of the loans extended by Nordea in Estonia go to the real estate and housing market. This poses a macroeconomic problem, as the investments in industrial development are too small.
      The majority of Estonians want their loans in euros nowadays, as the interest rate is some 0.5 percentage points lower in euro-denominated loans compared with loans in Estonian crowns.
      Estonians seem to rely on there being no exchange rate risk when switching to the euro. Estonian politicians and the central bank are also assuring citizens of this. Rosenström is slightly perplexed by the confidence, because the question of changing to the euro will be a political one.
     
Due to the low level of interest rates in Estonia, many Finns have begun to ponder whether they should ask banks in Tallinn for loans.
      If the collateral for the loan is in Finland, receiving credit in Estonia is not legally possible even though the country is a member state of the EU.
      If a Finn buys a piece of property in Estonia, the loan can be taken from a local bank, as the guarantee is also Estonian.
     
Helsingin Sanomat / First published in print 20.5.2005

More on this subject:
 FACTFILE: Nordic banks control Estonia

HEIKKI AROLA / Helsingin Sanomat
heikki.arola@hs.fi