Policy Actions for Affordable Housing in Lithuania
Introduction:
The cost-of-living crisis and Russia’s war of aggression against Ukraine have created a challenging context for housing policy actions in Lithuania, as strong inflationary pressures are making it harder for households to make ends meet. As in many OECD countries, the effects of the COVID-19 pandemic on the housing market linger: in late 2022, housing prices in Lithuania remained over 16 percentage points higher than pre-pandemic prices in late 2019. Rising construction costs, driven by increases in construction materials and labor, are making it harder to build housing at affordable rates. Since the second half of 2021, construction costs for residential buildings have increased dramatically, with a year-on-year increase of 19% in September 2022 – more than double the growth between September 2020 and September 2021. Meanwhile, a declining, ageing population and persistently high levels of regional disparities could lead to a potential shift in future housing demand.
The cost-of-living crisis and the Russian war of aggression against Ukraine create a challenging policy actions:
The current policy context is especially challenging in Lithuania. Strong inflationary pressures – driven by increases in food and energy prices – are making it harder for households to make ends meet. Headline inflation in Lithuania peaked at 22.5% in September 2022 before coming down by ½ percentage point in October. Inflation is projected to remain high in 2023 (11.9%) before abating in 2024 (4%). As in many OECD countries, nominal wages have not kept pace with increasing prices, leading to a fall in real wages and a decline in purchasing power, on average, among Lithuanian households. Russia’s ongoing war of aggression against Ukraine, which has already displaced millions of people, has put additional pressures on the housing market and contributed to the cost-of-living crisis in OECD countries.
Lithuania’s ageing housing stock is dominated by owner-occupied, multi-apartment buildings:
As in many neighboring countries, Lithuania’s housing stock is ageing and dominated by owner-occupied, multi-apartment buildings. Lithuania has the highest rate of home ownership in the OECD, with over 90% of households owning their home. This is in large part the legacy of the generalized privatization of the state-owned rental housing stock that began in the early 1990s in the transition to a market economy, similar to the evolution of the housing stock in many neighboring countries. The high rate of home ownership is accompanied by a thin rental market and a highly residual social housing sector. Much of the housing stock is ageing and of poor technical quality, with critical gaps in basic amenities. Multi-apartment buildings comprise nearly 60% of the housing stock – well above the OECD average of 40%.
Low household spending on housing costs masks emerging affordability challenges:
Low average household spending on housing in Lithuania masks a persistent housing quality and emerging affordability challenge. Before the current cost-of-living crisis, despite rising housing prices, average household spending on housing was relatively low in Lithuania relative to other OECD countries. In 2020, the most recent year for which data are available, overall housing costs – which include housing, water, electricity, gas and other fuels – equaled 15% of total household consumption expenditure in Lithuania, compared to an OECD average of over 22%. Fewer than 3% of all Lithuanian households were overburdened by housing costs, in that they spent more than 40% of their disposable income on housing. The share reached just 9% of households in the bottom quintile of the income distribution, well below the OECD average of 27%.
Home ownership support schemes for young households should be reassessed:
Despite the relatively high home ownership rate among young people in Lithuania, nearly two in five people aged 20 to 29 years old live with their parents. The government operates two programmes to support young families to purchase their first home by providing financial support for a down payment. Both programmes target households under 36 years old and are operated by the Ministry of Social Security and Labour. A means-tested housing credit support programme, Parama bustui isigyti, provides households who meet income and asset tests with a subsidy to contribute to a mortgage or down payment for the purchase of their first home.
Conclusion:
The proposed set of recommendations for the Lithuanian authorities are intended as a comprehensive policy package focusing on both targeted measures to improve the efficiency and effectiveness of existing support schemes and policies, as well as more broad-based efforts to address key structural challenges in the housing market. Some recommendations could generate results relatively quickly, while others will take more time to develop. For instance, one priority for the short term could focus on evaluating and improving the effectiveness of existing housing support (such as the rent compensation scheme and the financial support measures for young families).
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