Innovations in housing sector

International Union for Housing Finance has published an article written by IWO's Managing Director Knut Höller, who highlights innovations currently happening in the Latvian housing sector. The complete article can be read in a Quarterly Journal of the International Union for Housing Finance, Spring 2021 edition.

Structure of the Stock

The available housing stock in Latvia is rapidly ageing and depreciating. Dealing with the building stock is one of the most difficult issues of the country's further transition to a market economy. Achieving climate neutrality by 2050 in the building stock through energy refurbishment must be combined with solving some other fundamental issues, such as the availability of affordable and quality housing, thus encouraging residents to remain in and increasing their mobility within the country. Approximately 1.4 million buildings with a total area of 206.56 million m² are registered in the country. Of all buildings 363,900 with a total area of 91.08 million m² are residential buildings. About 285,000 buildings are heated. The number of single-family houses is the largest; 309,900 (13,938 two-family houses), but by area this is only 17.6 %. Multi-family buildings (three and more dwellings) represent the largest proportion of the total area (51.55 million m²) with 24.9 %, although they represent only 2.81 % (39,400) of the total building stock. Almost half (44%) of the residential buildings are in the capital Riga and its surroundings (Pieriga). In the very sparsely populated southeastern region of Latgale bordering Russia and Belarus, the number of single-family houses is larger than in the Riga surroundings. The number of non-residential buildings of around 1 million indicates that only 18.5 % of all non-residential buildings are concentrated in Riga (about 74,000) and the other eight so-called large cities of Latvia (111,000). Of the non-residential buildings, only 108,000 are heated. A large proportion (44,5%) of the multi-family buildings were built before 1941. Of these, more than 8,600 buildings have exterior walls made of wood. The constructions of the post-war years (1941-1960) were characterized by good quality and in the housing sector mainly brick buildings were built as part of the standardized Stalin-era projects.

2.2. Deformed housing market: homeowners predominate, rental relationships mainly in the shadow market

Like many former Communist countries in Central and Eastern Europe, home ownership is by far the dominant tenure in the Latvian housing market. The privatisation of the housing stock in the 1990s had the result that just over 7 out of 10 Latvian households live in housing that is owned outright (e. g. without an outstanding mortgage or housing loan), which is well above the OECD average of just under 43 %. Fewer than 9 % of Latvian households live in owner-occupied housing with a mortgage, which in turn is significantly lower than the OECD average of almost 25 %. Meanwhile, Latvia’s rental market, consisting of both private and subsidised rentals, is very small from an international perspective, representing around 12 % of all household tenures; the rental housing makes up on average 28 of housing tenures in the OECD. There is, by extension, a sizeable “shadow” rental market in Latvia, though there are no data to indicate the size of this segment of the market. Lithuania, the Slovak Republic, Hungary, Poland, Slovenia and Estonia have a broadly similar housing tenure structure. With a share of 0.4 % of the total housing stock in 2016, Latvia has the smallest social housing stock in the EU (on average 8 %). There are currently 7,000 people waiting for housing.

2.3. Housing situation often difficult and in poor technical condition

At the request of the Latvian government, the OECD analysed the Latvian housing market in 2019 and 2020 and made recommendations for an affordable housing policy. Latvian households currently do not spend much on housing costs on average. Expenditure on housing and utilities is around 21 % of the final consumption in Latvia and compares to the OECD average of around 23 %. However, the low spending masks another challenge: poor housing quality. In many cases basic sanitation facilities in 2017 are missing. In addition, some 15 % of Latvian households suffer from “severe housing deprivation”. Eurostat[1] defines severe housing deprivation as living in a dwelling with overcrowded conditions in addition to at least one of the following housing deprivation measures: leaking roof, no bath/shower and no indoor toilet, or a dwelling considered too dark. OECD countries with a high rate of severe housing deprivation tend to be dominated by homeowners. In Latvia, nearly 60 % of the “severely deprived population are homeowners, 25 % are renters, either in the private market or in subsidised housing.

2.4. Lack of affordable housing limits society

There is another challenge that is not immediately obvious from the typical housing affordability indices: Most Latvians cannot afford a mortgage to buy a home – meaning that many renters cannot afford to become homeowners, and many homeowners cannot afford to move. Across the country, fewer than half of Latvian households could afford a new mortgage on a 50 m2 apartment, while only one third could afford a mortgage on a 75 m2 apartment. The OECD calls this group the so-called "missing middle" households and sees them facing the following challenges: “The first is that the housing market lacks affordable rental housing alternatives that would typically be available to lower- and lower-middle income households who may not be able to afford a mortgage to purchase a home. The second is that the large share of homeowners (who are ineligible for existing housing support) live in housing of poor quality and are not able to afford the costs associated with maintenance or upgrades “, (OECD 2020, p. 51). This results in a situation where around 44 % of all households (= 1/3 of population) are too rich to qualify for social housing and the housing benefit, and too poor to afford a mortgage. As a result, the Latvian government is currently working on the issue of housing affordability, planning various programs to increase the supply of affordable housing and completing a reform of the outdated tenancy laws. Another issue related to population decline and internal population migration from the provinces to the Riga metropolitan region is the vacancy rate of flats. The Housing and Population Census 2011[2] found another factor influencing the structure of the housing stock. One in five dwellings has no permanent occupant and is unoccupied. One challenge will therefore remain: how to deal with housing stock that is no longer needed and who bears the costs for its removal. (…)

[1] https://ec.europa.eu/eurostat/statistics-explained/index.php/EU_statistics_on_income_ and_living_conditions_%28EU-SILC%29_methodology_-_housing_deprivation (assessed on 14.02.2020).

[2] https://www.csb.gov.lv/en/statistics/statistics-by-theme/population/census/search-intheme/1335-housing-and-population-census-2011-data-housings (assessed on 14.2.2020).

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