Assessment of Price Bubbles in the Housing Market of Latvia

Residential prices reached their peak in the Latvian housing market in 2008. According to local, national and global statistics, housing prices in Latvia, particularly in downtown region of Riga, have belonged to the most expansive ones in Europe since the 2000s. In this context, a sharp increase of around 600% and a subsequent decrease of about 70% in residential prices took place in Riga between 2003 and 2009. In 2008, with required capital injections of around $ 15 trillion, the financial and economic crisis took place. Latvia's structure of GDP mostly included real estate with a stake of around 17,5% in 2008. Consequently, the economy contributed to 50% of the cutback of real GDP growth. Putting it in a nutshell, there is also a mutual relationship between the Latvian mortgage and banking crisis. Therefore, Latvia's economy was particularly hard affected by the bubble burst in the domestic real estate market in 2008. The Latvian housing market also exemplifies the mechanism of relationships of commercial banks and homeowners.