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 indowntown region of Riga, have belonged to the most expansive ones in Europe since the2000s. In this context, a sharp increase of around 600% and a subsequent decrease of about70% in residential prices took place in Riga between 2003 and 2009. In 2008, with requiredcapital injections of around ＄ 15 trillion, the financial and economic crisis took place. Latvia’sstructure 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 itin a nutshell, there is also a mutual relationship between the Latvian mortgage and bankingcrisis. Therefore, Latvia’s economy was particularly hard affected by the bubble burst in thedomestic real estate market in 2008. The Latvian housing market also exemplifies themechanism of relationships of commercial banks and homeowners.