Citadele: Building and buying a private house can cost more than its value

The rise in the prices of building materials has affected transactions with private houses – mortgage loan borrowers have difficulties in meeting the planned construction costs. On the other hand, when choosing to buy a ready-made house, there is already a tendency for the purchase amount to exceed the value of the property in the most sought-after areas, according to Citadele Bank’s information on mortgage loans. The rise in the price of building materials has affected the loans issued for the construction of private houses before the increase in costs, increasing the contribution of the customers themselves. So far, it has affected a small part of mortgage loan borrowers, while borrowers who received loans for house construction last fall and at the end of last year, and construction orders were not placed at the prices of that time, could have the greatest difficulty in fitting into the planned costs and submitted estimates. “Six months can even go by without actually starting construction, so there are cases where clients haven’t had time to start construction yet, and seeing the cost increase, there are two scenarios. The first – increase their own investment and cover the increase in costs, or the second – stop the construction. There are such cases, but they are not massive yet, and perhaps in the fall the prices will compensate in the building materials market, however, there is no guarantee that it will be cheaper to build in time or that it will be possible to fit into the previously planned estimate. Both when building and buying a private house, it is now really important to assess whether the amount of money that will be invested in it will correspond to the market value of the house,” says Jānis Mūrnieks, head of the Citadele bank’s personal services department. When granting a loan for both house construction and purchase, banks assess the market value of the property – in the case of construction, the market value upon completion of the project, and the existing market prices in the case of a ready-made house. The increase in construction costs, or the increase in the estimate, is not directly related to the market valuation. The cost to build may increase, but the value of the property itself does not increase as rapidly. For example, if instead of the originally planned 100 thousand euros, the construction of a house costs 120 thousand euros due to price increases, this does not mean that the value of the house will be 120 thousand euros. Perhaps in the future the market value will catch up with these additional costs and that will be the price of the house, but the real costs are not immediately reflected in the market value. It may also be that the market value does not increase to the amount invested. “Often, when they see an increase in costs, people change their mind and choose to buy a ready-made house instead of construction, however, the offer is not large, and already in mortgage loan applications we see transactions in which the purchase amount of the house is greater than its value. We consider each case individually, however, it should be noted that the bank cannot ignore the fact that the purchase is higher than the value. Most likely, in such a case, there will be a larger own contribution. If you want to avoid the increase in construction costs, you need to evaluate it, because maybe even with all the price increases, it is more profitable to build a house that you really want, rather than buying a ready-made house built for someone else’s needs above the market value,” says J. Mūrnieks.

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