Finland's housing market looks set fair for 2016, having ended 2015 on a positive note. Although house price growth remains slow, construction activity has been rising. Also, the country's economy is picking up, a little.
In Q4 2015, the average price of old dwellings rose by 1.2% y-o-y (1.4% inflation-adjusted) to €2,274 (US$ 2,507) per square metre (sq. m.), based on figures from Statistics Finland.
Blocks of flats rose by 2% y-o-y to €2,431 (US$ 2,680) per sq. m.. Terraced houses stagnated with a 0.1% increase, to €2,077 (US$ 2,290) per sq. m.
New dwelling prices remained stagnant. In Helsinki, the average price of new dwellings rose by only 0.1% y-o-y (0.3 inflation-adjusted) to €4,879 (US$ 5,370). The average price in the rest of the country was around €3,085 (US$ 3,396), up by 0.6% (0.8% inflation-adjusted).
In Q3 2015, Finland was named the weakest economy in the euro zone, with an economic contraction of 0.6% q-o-q (-0.8% y-o-y) following three years of stagnation, prompting the country's finance minister to label it "the new sick man of Europe".
At the heart of this has been the rise of the Smartphone and the inability of Nokia to compete. Between 1998 and 2007, Nokia was responsible for 20% of all of Finland's exports, and in 2000 Nokia alone accounted for 4% of the country's entire GDP. But by 2008-9 the writing was on the wall, and the February 2011 partnership with Windows failed to save the company; by mid-2012 Nokia was almost bankrupt, and its contribution to Finnish GDP was actually negative. In April 2014 Nokia sold its mobile phone business to Microsoft. Nokia's decline (though it is still the second largest mobile company in the world by sales volumes, but its business is low-end and profitability is low) left over 40,000 highly-skilled Finnish ICT workers unemployed.
This pool of highly skilled workers may yet fuel a Finnish start-up boom. Meantime, times are tough. Wages in Finland are high, and the country is uncompetitive. GDP contracted by 0.4% in 2014, 1.1% in 2013, and 1.4% in 2012. Ideally Finland's currency should be devalued, but Eurozone membership makes this impossible. The country also has a rapidly ageing population and one of the highest rates of government spending in Europe, and the Russian economy, a major trading partner, is in deep recession.
Economic output is still 5% below pre-crisis levels. Unemployment continues to rise, hitting around 9.3% in January 2016, up from 8.7% in 2014, according to Statistics Finland. Yet one should not exaggerate. Finland's situation is not as bad as Italy's.
The finance ministry predicts that the economy will pick up in 2016 and 2017, with 1.2% growth forecast for both years, with economic activity driven by domestic demand instead of foreign trade. GDP rose just 0.2% in the full year of 2015.
In the April 2015 parliamentary elections the Centre Party headed by millionaire Juha Sipila won 49 seats in the Parliament, beating former Prime Minister Alexander Stubb, whose party came third with 37 seats. Second was the rising eurosceptic Finns Party, led by the charismatic Timo Soini, which won 38 seats.
Sipila became Prime Minister on May 29, 2015, and he has pushed the country in the direction of austerity, in an attempt to regain competitiveness. Sipila has also moderated the outcry against refugees, by offering to share his own house with refugees.
Housing loan interest rates are now amazingly low. The average interest rate for new housing loans in Finland was 1.27% In December 2015 - down from last year's 1.63% .
These low rates are stimulating the housing market, despite the weak economy. Almost €1 billion (US$ 1.1 billion) worth of residential property was transacted in the first three quarters of 2015, well above the €600-€700 million (US$ 660 - US$ 771 million) of transactions in 2013 and 2014, and more than double than the €100-€300 (US$ 110 - €330 million) total annual volume from 2006 to 2012, according to the research organization KTI Finland.
Housing starts rose 17.18% y-o-y (completions were up only 1.3%) in 2015, though the number of dwelling permits dropped 0.13% during the year to November 2015. In their Autumn 2015 Market Review, KTI noted that investors' interest in residential property is backed by rising rental demand in all major cities, especially in Helsinki.
The Finnish tax system still privileges owner-occupation, for despite reforms during the 1980s, a flat 29% tax deduction on mortgage interest remains in place, while imputed rental income and capital gains on permanent homes are untaxed.
Gross rental yields in Finland range from 3.63% to 4.36%, with smaller apartments having higher yields than bigger ones, according to Global Property Guide's research in August 2014.
In Helsinki, yields for 35 sq. m. and 70 sq. m. apartments averaged around 4.36% and 4.03%, respectively. Larger apartments of up to 120 sq. m. had average yields of 3.63%.
Despite the complete deregulation of the private rental market in 1995, private rents are still distorted by the large social housing sector. After the initial rapid rent increases following rent liberalization, rental growth was slow. From 2001 to 2007, house prices in Finland rose by around 50%, while private rental rises trailed with growth of only 17%. In Helsinki, house prices rose 55% while private rents rose by only 12%, leading to the relatively low rental yields.
In 2014, rented dwellings accounted for around 31.5% of all dwellings in Finland. Of these, 40.6% were government-subsidized, with average rents 26% lower than private rents in Helsinki, and 13% cheaper in Finland as a whole.
There are signs that rents rises may be catching up with prices. The country's monthly average rent went up by 3.2% to €12.41 (US$ 13.68) per sq. m. in 2015, according to Statistics Finland. Private rents went up by 2.8% to €13.19 (US$ 14.54) per sq. m., lower than the 3.6% rent hike to €11.47 (US$ 12.65) per sq. m. on government-subsidized rents.
In Greater Helsinki, the average monthly rents in 2015 rose by 3.3% to €14.97 (US$ 16.51) per sq. m. Private rents were around €17 (US$ 18.74) per sq. m., way higher than subsidized rents that had an average of €12.64 (US$ 13.94) per sq. m.
In the rest of the country, the average rent rose by 3.2% to €11.13 (US$ 12.27) per sq. m. monthly. Subsidized rents were averaging €10.86 (US$ 11.97) per sq. m., while private rents had an average of €11.34 (US$ 12.50) per sq. m.
From 1980 to Q1 2009, the country experienced several dramatically acute house-price cycles:
INFLATION-ADJUSTED PRICE CHANGE OF EXISTING DWELLINGS
|Finland||Helsinki||Rest of Finland|
|1983 – 1989||64.00%||68.50%||--|
|1989 – 1993||-49.20%||-53.40%||-44.40%|
|1993 – 1994||6.60%||10.30%||3.20%|
|1994 – 1995||-4.80%||-6.30%||-1.90%|
|1995 – 1999||45.00%||62.80%||38.00%|
|1999 – 2001||-6.90%||-5.50%||-12.00%|
|2001 – Q2 2008||42.00%||45.70%||33.40%|
|Q2 -2008 – Q1 2009||-6.40%||-8.60%||-4.00%|
|Source: Statistics Finland|
The relative volatility of house prices in Finland has 3 main causes:
Finland’s most recent house price boom from 2001 to Q2 2008 was typical. There was strong economic and wage growth, plus a decline in interest rates.
Outstanding housing loans to Finnish households rose 153% from 2000 to 2008, from €24.3 billion to €67.6 billion; or from 18.4% to 36.3% of GDP. Finland's outstanding mortgage loans rose from 16.7% of GDP in 1995, to 44.3% of GDP in 2015, according to the Bank of Finland. From 1998 to 2007, outstanding housing loans experienced double-digit annual expansions averaging at around 14%.
The highest increases in mortgage loan growth were in 2004 (17.44%) and 2005 (16.72%), when the ECB’s base rate was around 2%, and average interest rates on new housing loans ranged from 2.8% to 3.2%, before rising to 5.53% in October 2008. The correlation between low interest rates and strong loan growth is obvious.
After a price fall of 5.5% in Q1 2009 (-7.01 inflation-adjusted), house prices bottomed out. A year later house prices reached another peak, rising by 11.43% y-o-y to Q1 2010 (11.25% inflation-adjusted). Subsequent price rises swiftly petered out as the economy fell into the doldrums. House prices only started to rise again in Q4 2015.
The current rise in housing starts (up 17.18% in 2015 to a total of 29,259 dwellings) has not been across the board. On the contrary, demand has lurched towards apartments.
Apartment starts rose by 31.8% y-o-y to November 2015, while detached housing starts fell 11.31%. Equally, permits for detached houses fell 18.32%, while permits for blocks of flats rose by 10.7%.
Finland’s small population of 5.5 million, and its huge land area (338,145 sq. km), make it one of the world’s least densely-populated countries. Its estimated GDP per capita stood at US$42,159 in 2015, making it one of the richest nations in the world.
However, the country’s rising debt as well as the recent recession has brought government finances under pressure. In October 2014, Standard & Poor's (S&P) cut Finland's credit rating to 'AA+' from 'AAA. This leaves Luxemburg and Germany as the remaining Eurozone countries triple-A rated by all three agencies. The other two ratings agencies retained their triple-A credit ratings for Finland, although all three agencies gave the country a negative outlook.
Finland's debt-to-GDP ratio was around 59.3% in 2014, closer but still lower than the 60% of GDP ceiling imposed by EU. In 2015, the debt-to-GDP ratio is expected to have increased to 62.7%.
The country's posted a 3.3% budget deficit in 2014. It is predicted to fall below 3% in 2016, according to the European Commission.
The country's inflation rate in 2015 was -0.1%, down from last year's 1%.
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