Finland: Price History

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Finnish house prices have risen more slowly

The Finish housing market is cooling fast. The prices of dwellings rose by 7.3% in Greater Helsinki during 2007, and by 5.5% in the rest of Finland (compared to 9.5% and 7.5%, respectively in 2006). Prices of Helsinki flats in old blocks rose by 5.9%, to €3,368 per sq.m.

Greater Helsinki dwellings prices have risen by 125% during the past decade - to €2,535 per sq. m. in 2005, from €1,123 per sq. m. in 1995. Prices for Finland as a whole have risen by 97% to €1,704 in 2005 from €867 in 1995.

There seems to be a definite slowing. Prices of dwellings in old blocks of flats rose nationwide by only 0.4% during the fourth quarter of 2007, though seasonal factors could enter into this. In Helsinki old flat prices rose by 0.7% q-o-q, and in Vantaa by 1.4% q-o-q. In Espoo and Kauniainen they fell by 1.2% during the quarter.

New drawdowns of housing loans by households in December 2007 amounted to €1.3 billion, down €0.4 billion from November 2007 and down €0.1 billion from a year earlier.

Finish house prices have been no exception to global trends. Simple simulation reveals that Finland has recorded instability in house prices over 1980 to 2007. An intense price booms occurred in 1984-1989, 1996-1999 and 2002-2007, when prices rose by 98.56%, 41.68% and 40.85%, respectively. On the other hand, three catastrophic falls in house prices were experienced in 1990-1993, 1994-1995 and 2000-2001.

Housing loans and interest rates

Interest rates have risen strongly and indeed this is the explanation for the house price slowdown. The average interest rate on new housing loans in December 2007 was 4.94%. The average interest rate rose slightly from November 2007, caused by the general increase in market interest rates as a result of the international financial market volatility. This is way below the historical peak of 13.7% in September 1992.

In Finland, over 90% of household loans are variable-rate loans, so a majority of the borrowers carry themselves the risk of an increase in interest rates. The most commonly used reference rate for new housing loan agreements in December 2007 was the prime rate, to which 51% of all new business on housing loans was linked. Consequently, prime rates gained popularity, crowding out Euribor rates, the most widely applied reference rates for housing loans in the last few years.

The stock of housing loans extended to households by MFIs amounted to €62.2 billion at the end of December, with an average interest rate of 4.99%. In December, the annual rate of growth in the stock of housing loans stood at 12.4%.

Construction output

Building construction and civil engineering activities in Finland continue to be fairly lively. Construction output increased by 2% during the Q3 of 2007.

The construction sector has been experiencing a shortage of materials as well as a shortage of labor, and construction costs have risen considerably despite the slowdown in housing construction. Building costs rose 4.4% from January 2007 to January 2008, according to Statistics Finland.

As the Bank of Finland expresses it, “a possible slowdown in the pace of construction due to financial market uncertainty will be to a certain point good for the overheated sector.”

Macroeconomic fundamentals remain favorable

Economic growth was 4.4% in 2007 from 5% in 2006. In 2008 it is expected to slow further to 3.1%. The main cause is a slowdown in export growth. Finland has recently experienced very strong growth, much higher than the euro area average.

The Economic Intelligence Unit projects 2.8% average growth 2009-12. Both the trade balance and the current-account balance will remain strongly in surplus and domestic demand will remain robust.

The economy is vulnerable to the fortunes of the information and communications technology sector, a major driver of GDP growth since the mid-1990s. Nokia is generally regarded as the single most significant cause of Finland's success.

Because of successes in that sector the economy has been strong for a decade now, though the techno-bubble burst caused an economic setback in 2001.

The inflation environment has remained manageable. There was 2.5% inflation in 2007, compared to 1.3% in 2006. Consumer prices were pushed up by increased housing costs, which in turn were affected by rising interest rates, higher prices of owner-occupied flats, and rent increases. Real wages rose by 2.9% in 2007 and 2.5% in 2006.

Unemployment, which peaked 16.6% in 1994, has been falling, standing at 6.7% of workforce in November 2007.

The tax system

The 1980s reforms gradually liberalized the housing market, yet owner-occupied housing is still privileged by the tax system. A flat rate of 29% deduction on mortgage interest remains. Imputed rental income and capital gains on permanent homes are also untaxed.

Yields and rents

Rental yields are now around 5% per annum. The private rental market is still relatively small with half of the country’s about 800,000 rental dwellings owned by social housing institutions. Local governments are still building more social dwellings every year.

About 72% of the 32,000 new apartments produced annually are financed or subsidized by the government. So even with the complete deregulation of the private rental market in 1995, private rents are still distorted, due to the large social housing sector. Government subsidized rents are 25% lower than private rents in Helsinki and 14% cheaper for Finland as a whole.

However, rents are catching up as a result of liberalization. While Helsinki region house prices rose by 48.77% between 1990 and 2005, private rents rose by 121.5%, mainly due to the decontrol implemented during the 1990s. Government-subsidized rents rose 103.4% from 1990 to 2005, faster than dwelling prices. Private rents in Helsinki rose by more than 11% in 1991, 1993 and 1997.

Recent rental growth has been slower. From 2001 to 2006 Helsinki region house prices rose by 40.24% (37.62% for Finland), while private rents trailed with growth of only 10.33% (11.76% for Finland). Private rents rose by 2.44% for Finland and Helsinki in 2005. In 2006, private rents rose by only 0.97% for Helsinki and 1.36% for Finland as a whole.

Further house price slowdown likely

The growth of house prices is expected to slow further to the level of 2-3% this year and in 2009, according to the Bank of Finland.

Relative to wage earners’ income and rents, house prices are still more affordable than at the end of the 1980s. As the Bank of Finland puts it, “in 2008-2009, the house price level is expected to remain unchanged in relation to consumer prices and to decrease somewhat relative to the income level.”

Finland - more data and information

• Finnish house prices, rents, and letting income - real data!
• How expensive are houses in Finland, compared to the rest of Europe?
• How much rent can be earned from Finnish property, compared to the rest of Europe?

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