Demands showing signs of slowdown
Lalaine C. Delmendo | March 13, 2022
Finland's housing market is now weakening, amidst rising interest rates and slowing economy. The nationwide average price of old dwellings rose by a modest 2.5% to €2,794 (US$2,784) per square metre (sq. m.) during the year to Q3 2022, a slowdown from y-o-y rises of 4% in Q2 and 4.5% in Q1, according to figures released by Statistics Finland. In fact when adjusted for inflation, prices actually declined almost 5% over the same period.On a quarterly basis, nationwide house prices fell by 1.5% (-3% inflation-adjusted) in Q3 2022.
In Greater Helsinki, the average price of old dwellings increased by a meager 0.2% to €4,794 (US$4,777) per sq. m. during the year to Q3 2022 and actually plunged by 7.1% in real terms. It was the region's worst performance since Q4 2015. In the rest of the country, prices rose by 4.3% (-3.3% inflation-adjusted) y-o-y to €1,990 (US$1,983) per sq. m.
By property type:
- The average price of terraced houses rose by 3.9% (-3.6% inflation-adjusted) y-o-y to €2,248 (US$2,240) per sq. m. in Q3 2022. Quarter-on-quarter, prices fell by 0.2% (-1.8% inflation-adjusted) during the latest quarter.
- Prices of blocks of flats were up slightly by 1.4% (-6% inflation-adjusted) to €3,088 (US$3,077) per sq. m. during the year to Q3 2022. On a quarterly basis, prices dropped 2.5% (-4.1% inflation-adjusted) in Q3.
Demand is showing signs of slowdown, amidst rapidly rising interest rates. In the first three quarters of 2022, total transactions of old dwellings fell a huge 22.6% to 48,855 units as compared to the same period last year, in stark contrast to y-o-y rises of 16.1% in 2021 and 12.7% in 2020, according to Statistics Finland. Sales transactions plunged 21.5% in Greater Helsinki and by 23% in the rest of the country.
In 2000 the government removed the requirement that a nonresident must obtain a permit to buy a secondary residential property in Finland, putting foreigners on exactly the same footing as Finns. However, foreigners need permission to buy property in the Province of Aland (Ahvenanmaa), an archipelago.
Residential construction activity showed mixed results, with dwelling permits and starts falling by 17.7% and 6.6% y-o-y, respectively, during the first eight months of 2022. In contrast, dwelling completions rose by 4.7% over the same period.
Overall, Finland's housing market is expected to continue to weaken in the medium term, as it faces considerable headwinds. In fact, the Mortgage Society of Finland expects house prices to start falling by end of this year. Accordingly, Finnish house prices will increase by a miniscule 1.5% this year and will fall by 0.5% in 2023. On the other hand, financial services provider OP Financial Group projects house prices to decline by 1% to 3% next year.
“The peak in the real estate market is behind us, demand has petered out and price development has become increasingly muted,” said OP Financial Group. “The market mood is being weighed down particularly by rising interests, but also by eroding economic confidence and increases in costs.”
Despite strong start, the economy is projected to slow during the remainder of the year. Bank of Finland expects the Finnish economy to grow by a modest 2.2% this year, before contracting by 0.3% in 2023. On the other hand, the European Commission projects miniscule growth of 1.8% in 2022 and 1.2% in 2023, a sharp slowdown from last year's 3% expansion.
Analysis
of Finland Residential Property Market »
Apartment yields in Helsinki are moderate
Rental property gives very moderate returns in Helsinki. Gross rental yields range from 3.53% to 5.29%. Smaller apartments earn the highest rental returns, while bigger apartments earn the lowest rental returns.
Prices of 60 sq. m. apartments are now EUR 6,700 per sq. m.,.
Rents range from EUR 21.60 to EUR 27.40 per sq. m. per month.
Round trip transaction costs are moderate in Finland. See our Property transaction costs analysis in Finland and Residential property transaction costs in Finland, compared to the rest of Europe.
Rental income taxes are generally high in Finland
Rental Income: Rental income is considered as income from capital and is taxed at progressive rates, from 30% to 34%. Income-generating expenses are deductible from the gross rental income.
Capital Gains: Capital gains are considered as income from capital and are taxed at progressive rates, from 30% to 34%.
Inheritance: Inheritance tax is imposed at progressive rates of 8%, 11% and 14% on the inheritance of the spouse, lineal descendants, and lineal ascendants.
Residents: Residents are taxed on their worldwide income. Capital income is taxed at progressive rates, from 30% to 34%. Earned income is taxed at progressive rates, from 66.25% to 31.50%.
Buying costs are low in Finland
Roundtrip transaction costs are around 7.77% to 10.25% of the property’s price. Real property transfer tax of 4%, usually paid by the buyer, is sometimes included in the selling price especially if the transaction involves an agent. It takes about 32 days to complete the three procedures needed to register a property.
Tenant protection laws are lenient
Finland law and practice is neutral between landlord and tenants.
Rent: Tenancies are generally unregulated. Landlord and tenant may freely negotiate rents, but the courts may reduce the existing rent if it significantly exceeds the current average market rate charged on comparable apartments in the area.
Tenant Security: The landlord must give a termination notice of at least six months if the tenancy has continuously existed for more than a year, and a three-month notice is mandatory for leases existing for less than a year.
Finland’s economy to slow this year
The Finnish economy grew by 3% in Q2 2022 from a year earlier, following y-o-y expansions of 3.9% in Q1 2022 and 2.9% in Q4 2021, primarily driven by strong private consumption and government spending, according to Statistics Finland. On a quarterly basis, the economy expanded by 0.9% in Q2 2022, after growing by 0.5% in the previous quarter.Despite the strong start, the economy is projected to slow during the remainder of the year due to the adverse impact of the energy crisis in the region, exacerbated by surging inflation. Bank of Finland expects the Finnish economy to grow by a modest 2.2% this year, before contracting by 0.3% in 2023. On the other hand, the European Commission projects miniscule growth for Finland of 1.8% in 2022 and 1.2% in 2023, a sharp slowdown from last year’s 3% expansion.
“Although the robust start to the year provides a good foundation for growth in 2022, the energy crisis triggered by Russia’s invasion of Ukraine will stifle growth towards the end of the year. Exceptionally high inflation is diminishing households’ purchasing power and consumer confidence has sunk to a very low ebb, curbing private consumption,” said the Bank of Finland in its September 2022 Interim Forecast.
“The Finnish economy is forecast to grow by 2.2% in 2022 and to contract by 0.3% in 2023,” the bank added.
To address the energy crisis, the government has recently announced a €10 billion loan and guarantee scheme for the energy sector.
The economy contracted by 2.2% in 2020, its worst performance since 2009, due to the imposition of strict coronavirus-related measures.
The eurozone debt crisis dragged Finland’s economy back into recession in 2012, three years after an 8.3% contraction during the 2009 global financial crisis. The economy shrunk by 1.4% in 2012, and the contractions continued in 2013 and 2014, with the economy shrinking by 0.8% and 0.6%, respectively.
In 2015, the economy, although freed from recession, barely grew. During the same year, Finland was named the weakest economy in the euro zone, which prompted the country’s finance minister to label it “the new sick man of Europe”.
At the heart of this has been Nokia’s inability to compete with the smartphone. 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 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 left over 40,000 highly-skilled Finnish ICT workers unemployed.
The country’s exports were also plagued by the economic recession in Russia, as well as by Finland’s inflexible labor market and high labour costs.
Yet the labour market continues to improve in recent years. In September 2022, the nationwide unemployment rate was 6.7%, down from 7% a year earlier and 7.5% two years ago, according to Statistics Finland.
There were 189,000 unemployed persons in September 2022, down slightly by 2,000 from a year earlier.
Consumer prices are rising sharply. In September 2022, inflation accelerated to 8.1%, up from the previous month’s 7.6% and the highest level since March 1984, mainly due to higher electricity costs and increases in the average interest rate on housing loans. Overall inflation averaged 0.7% from 2014 to 2020, before rising to 3.2% in 2021.
Finland’s budget deficit fell back to a manageable level of about 2.6% of GDP in 2021, after it surged to 5.5% of GDP in 2020 due to the government’s introduction of massive stimulus packages to boost economic activity amidst the pandemic. The shortfall is expected to fall further to 2.1% of GDP this year, based on IMF forecasts.
Finland’s debt-to-GDP ratio stood at around 66.2% last year, slightly down from 69% in 2020 but still up from 59.6% in 2019.