In the current market conditions, buying a ready-made house is cheaper, but building it yourself gives you the opportunity to customise it to your liking and control the quality, but it also requires more time and attention in the construction process. What are the other key factors to consider?
Credit is recovering and there are opportunities for finance
According to the observations of the real estate agency AVER, the situation on the real estate market has been gradually stabilising over the last two months, with an increase in activity among both buyers and builders. For example, according to the Bank of Latvia’s data on loans to households for the purchase, reconstruction and renovation of dwellings, in January 2023 there was a sharp decline in loans to the level last recorded in early 2021. The average amount of mortgage loans granted in February this year fell by around 25% compared to the 2022 average, but in April both the average amount of loans and the number of applications increased by around 10%.
Buying a home remains by far the most popular choice in the real estate lending market, but there are also plenty of enterprising self-builders. For example, among mortgage borrowers in 2022, according to Citadele data, 70% took out mortgages to buy an apartment, 23% to buy a detached house, and 7% required financing to buy land for construction. Among those who built their own house, people in 2022 mostly chose a compact and practical layout, and the total area of the building was 100-125 square metres.
Cost, energy efficiency and time
On the one hand, the trend is logical: buying a ready-made home is quicker and less complicated – you can start living there much sooner, avoiding the long and complicated construction process. Sometimes the situation also forces it: there are no available plots in the chosen neighbourhood. At the same time, a self-built project gives you the opportunity to tailor your home to your individual needs and tastes, giving you the freedom to use your imagination and choose the materials, design and layout.
In general, it is more affordable to buy a ready-built house: most of the houses on the market were built at a time when costs were still lower. Both inflation and the price of building materials, which are now stabilising, make it more expensive to build a house in the current climate. There are also additional costs for land acquisition, formalities, project development and time – the average process takes 1.5-2 years from project development to move-in.
Energy efficiency is an important factor to consider when making a decision: while a recently built building or a self-designed project offers a certain guarantee of energy efficiency, older houses on the secondary market may require additional costs and investments to improve and renovate energy efficiency. On the other hand, the choice of materials and solutions may weigh in favour of the project itself: building a house yourself means being sure of the quality of all the materials chosen.
Builders, while mostly honest, will always look for ways to save a little – sometimes on materials that are not always immediately visible to the naked eye. If you are building a house, one of the things you should not skimp on is the choice of construction company, which should be made on the basis of good recommendations, taking into account previous work, as redoing a poor-quality job often requires a bigger investment than paying a quality builder initially.
It is also advisable to rethink the supervision of the construction process: instead of relying on your own knowledge, it is better to hire an independent, professional structural engineer to assess what is happening on site, even if only once a week.
If construction costs rise, you may have to pay extra out of pocket
But perhaps the most important issue when making the final decision is raising finance – few families in Latvia can afford to buy or build a house without bank finance. If the house is bought ready-made, the process is simpler: the bank assesses the property, the buyer’s creditworthiness and decides whether to grant a loan. The process of building a private house, on the other hand, is more complicated: you need to provide the bank with a detailed estimate. The bank assesses the relevance of the estimate, the future valuation of the property and extends credit in instalments during the construction process.
One of the biggest risks in this case is the increase in construction costs – the bank will not always be prepared to increase the loan amount accordingly. This means that you may have to pay extra out of your own pocket. AVER observations show that the increase in construction costs compared to the original forecast is as high as 15% for private houses.
How big of a loan can I get?
It is also important to make an objective assessment of your financing options early on. The average mortgage borrower’s share of the purchase price is usually 15-25%. Last year, Citadele estimated that 64% of mortgage borrowers had incomes above €1,200 per month and the average loan amount was €85,000. Anyone can assess their own credit potential before visiting a bank, as banks are relatively open about their criteria: the maximum lending limit in the largest Latvian banks is 72 net salaries. So if the wife’s salary is €1 500 and the husband’s €1 000, the family’s total credit basket cannot exceed €180 000. In addition, the loan payment cannot exceed 40% of the average monthly income.
The resale value depends on various factors, but it is possible to sell both a self-built and a ready-built house successfully if there is demand in the market. In this respect, it is important to investigate another nuance before building a detached house: how much other similar properties in the area cost, as this has a significant impact on the overall valuation and resale potential. AVER experience has also shown that a quality and beautiful house built in a remote location does not sell for the amount invested in its construction, and the actual sale price is in some cases as much as 30% lower.
In this context, it is also worth mentioning again the banking policy: the maximum amount of financing for construction or purchase of real estate is available mostly in large cities, while in the rest of Latvia it may be lower. For example, Citadele Bank finances construction up to 85%, but the purchase of building land – only up to 60%. So, if the transaction takes place in a more remote region – the financing will be lower.
