Housing finance has experienced rapid development in Estonia during 2000–2006. In a very open economy with strong macroeconomic policies and the ultimate goals of accession to the European Union and the Economic and Monetary Union, the necessary environment for financial deepening was created already before the year 2000. From the initially very low levels of financial deepening the steady decrease in interest rates and improved credit conditions have boosted household and corporate sector borrowing, which has been strongly supported by foreign funding. As a result, household debt has increased almost five times from the level of 15% in 2000 to the level of 74% of net disposable income in 2006. Improved availability of credit has brought along a robust development in the residential property market where prices doubled during the three years between mid-2003 and mid-2006 and started to level off after that. The present article aims to provide a short overview of recent housing finance developments in Estonia as well as indicate the main determinants and major implications of these developments. Section 1 offers an overview of recent developments in the housing finance market. In Section 2 the underlying factors responsible for the direction of last years’ developments in the housing   finance market are discussed in short. Section 3 deals with the potential implications of these developments for the whole economy as well as the financial sector. Section 4 discusses policy issues that arise in connection with housing finance developments.

Household borrowing in Estonia entered into an active development phase in 1999–2000 in the aftermath of the Russian crisis when large Scandinavian banking groups acquired several of the larger Estonian financial institutions. Initially, banks remained cautious towards the corporate sector and mortgage loans became their main product. During that period the competition for market shares started to intensify. By the end of 2000, the annual growth rate of household credit exceeded 40%, reaching even higher levels during the following years. Starting from 2000, household debt has experienced rapid growth. The ratio of household debt to GDP rose from 8.5% to 41% by the end of 2006 (see Figures 1 and 2). The ratio of household debt to disposable income went up from 15% to 74% by the end of 2006.