After independence in 1991, Estonia embarked on a dramatic and, so far, successful economic reform that has drawn significant amounts of foreign investment to the country. According to EstiPank estimates, Estonia’s 2005 third-quarter economic growth reached 10,8%, considerably exceeding the estimated potential growth of close to 7%. Inflation, which fell to 3,9% in November, is showing signs of decline. And the unemployment rate has decreased to the lowest level since 1993, 7%.

This new notoriety as a fast growing economy is evident in its rapid housing market growth. The current stable financial situation spurred housing loans annual growth rate to a historic peak of 57% by the fall of 2005. Although the robust increase in housing loans can be considered natural in the context of the current economic situation, as it reflects the optimistic future outlook of Estonian residents, the present growth rate greatly exceeds the level characteristic of stable economic development. Consequently, EstiPank said measures are being taken to ensure economic policy conditions that would help preserve stable economic development and further increase in income even when the growth of loan volumes slows down in the years to come.

In the recent years, real estate prices have increased by over 20% - twice faster than the growth in income. The third quarter of 2005 witnessed an even faster increase in real estate prices, where annual growth rate has reached approximately 30%. The housing market contains numerous risks, especially as banks have started to base their decisions to grant a loan on the collateral rather than on the loan servicing ability of the customer.

Estonia’s economic growth promises to continue, despite some difficulties due to their accession to the EU. The Estonian Institute of Economic Research (EKI) said economic growth for 2006 is expected at 8%.