Estimating Under-Reported Real Estate Transaction Value: Evidence from Latvia

Compared to other EU countries, the informal economy constitutes a relatively large share of economic activity in Latvia, inherently leading to weaker formal financing. Within the mort-gage market, this negative impact operates through two primary mechanisms: first, under-reported income lowers borrowing capacity by inflating debt service-to-income ratios; second, under-reported real estate transaction values distort market data, hindering accurate collateral valuation. This study focuses on the latter mechanism, quantifying the transaction value distor-tion within the residential apartment sector by comparing the gap between listed and reported values for mortgaged versus non-mortgaged transactions. Combining data from the Real Estate Transactions database, the Bank of Latvia’s Credit Registry, and web-scraped real estate listings between 2021 and 2025, this study reveals that for non-mortgaged apartment transactions, the gap between the last listed price and the reported transaction value is approximately 11 percent-age points larger than for otherwise comparable mortgaged transactions, which are assumed not to exhibit under-reporting of transaction values due to differences in tax incentives and bank oversight. Furthermore, this discrepancy expands by an additional 4 percentage points when the seller has owned the property for 60 months or less, a threshold below which transactions fail to be eligible for the ownership-period-based capital gains tax exemption.

Keywords: Real Estate; Tax Evasion, Housing Market
JEL Codes: R32, H26