Big cities, significant differences: what factors shape different housing markets?

The most significant difference was in 2020: 5,161 dwellings were sold in Vilnius and 831 in Kaunas, while last year, the difference was slightly smaller but still amounted to 4.7 times.

Why are the second-largest city’s housing market dynamics less reflective of economic cycles? Why is it that neither in 2021 nor recently has the same growth been recorded as in Vilnius?

The population of Kaunas is almost half that of the capital. According to the data for 2024, Kaunas had about 391,000 inhabitants, and Vilnius had about 730,000. Interestingly, about 10% of new inhabitants in Vilnius come from Kaunas.

The average monthly salary in Vilnius is also only 15% higher, while prices are 28% higher; so, in theory, for the same wage, Kaunas residents can buy a larger housing area.

So why are the differences in housing markets so large?

On the one hand, the combination of demographic and economic circumstances and their overall difference is of greater significance than can be seen by comparing individual statistical series. Contrary to what it might seem, their influence is much more significant than housing affordability alone.

Vilnius is perceived as a city of great potential. It has many high-value-added and high-wage jobs, and high migration to the city is driving high demand for new housing. While Kaunas has undoubtedly attracted significant foreign and domestic investment in recent years, often eclipsing the capital with its big names, this is a long-term process that still requires time.

The materialisation form of these investments also differs. New manufacturing companies are more commonly heard of in Kaunas than service companies. It may influence wage limits; however, fewer modern business centres are being opened. These centres serve as both an indicator and a catalyst of a city’s economic strength.

It is not without reason that Citus experts often compare Vilnius with Kraków, Wrocław or Helsinki. Regarding the number and growth of area in business centres, these cities are more similar to the Lithuanian capital than Riga or Tallinn. Or Kaunas. This indicator reflects the city’s vitality and competitiveness.

A healthy office market has a vacancy rate of around 7%. In Vilnius, the vacancy rate is now 8–9%, while in Kaunas it is only 3–4%.

It indicates that Kaunas lacks modern office spaces for businesses to expand or establish themselves. As a result, the city struggles to compete with Vilnius, and the growth of highly qualified jobs and residents with strong purchasing power is slower. A shift in this area could create opportunities for increased demand for investment housing and boost motivation for more residential development.

Due to this situation, major Lithuanian developers are less active in Kaunas and focus their efforts on the capital. In the country’s second-largest city, they currently see lower liquidity and higher risks. Vilnius, in contrast, tends to have more stable demand and faster sales.

It has led to a less diverse market supply in Kaunas, which – most importantly – is relatively small. In January, Kaunas residents had less than one-fifth of amount of new housing to choose from. Undoubtedly, this is one of the cornerstones preventing the market from developing and growing.

The current situation, where the housing market is passive, supply is low and prices are still rising faster than in Vilnius, threatens Kaunas housing market with stagnation and becomes its normal state. At the same time, systemic problems will, in the long term, prevent the use of the available potential, unsustainable development will continue and the city’s regional competitiveness will decline.

Vilnius is pursuing a Western strategy: concentrating development, preventing the city’s boundaries from being eroded and shaping areas as multifunctional urban centres.

Historically, Kaunas has been expanding into the suburbs for much longer, where terraced housing estates were built. Thus, the city boundaries have developed, but the territories have remained monofunctional, with the market being shaped by small developers who are less able to take on large projects. As a result, even new projects that are now springing up close to the centre are often less creative, with their architecture and solutions less in line with the expectations of today’s buyers.

To remove the main barriers to the housing market, it is first necessary to encourage investment in modern office complexes. There is certainly space in Kaunas, but what is needed is a clear plan of where and what to build, a clear strategy for attracting investment and incentives for developers. It is not a short-term project or a specific job to be done in a year.

Another area for long-term change is the city’s urban strategy. An integrated approach aimed at increasing the city’s multifunctionality would allow the creation of a diverse urban fabric that meets the needs of today’s population. Involving citizens and businesses in decision-making – through public forums or online platforms – would allow a better understanding of market needs and develop solutions that meet economic and social criteria.

An additional particularly important factor is bureaucracy. The situation in this area is similarly unfavourable in both major cities – the issuance of building permits is very complicated. Still, in Kaunas, the problem is more acute because of the different typology of market players. However, the city has the tools to reduce the bureaucracy, and if this is done to a significant extent, a competitive advantage over the capital can be created.

Analysing international examples such as Berlin, Milan and Stockholm show that flexible and innovative urban development policies can be key drivers in enabling a city to fulfil its potential.

The transformation of a city is inextricably linked to the ability to create attractive and integrated environments where business, residential, leisure and cultural spaces intersect. If Kaunas undertakes bold and coherent reforms – encouraging investment in modern office space, reviewing its urban strategy, cutting red tape, and involving residents and businesses in decision-making – it will not only be able to attract new businesses, but also create a dynamic economic cycle that not only stimulates demand for housing but also increases its attractiveness to investors and potential residents.