Finland’s housing market remains weak

Finland’s housing market remains subdued, amidst rising interest rates and a struggling economy. The nationwide average price of old dwellings rose by an anemic 0.59% to €2,707 (US$2,964) per square meter (sq. m.) during the year to Q3 2023, following y-o-y declines of 1.73% in Q2 2023, 4.23% in Q1 2023, 5.95% in Q4 2022 and 1.28% in Q3 2022, according to figures released by Statistics Finland. When adjusted for inflation, prices declined almost 5% over the same period.

Quarterly, nationwide house prices fell by 2.52% (-2.99% inflation-adjusted) in Q3 2023.

Finland’s house price annual change

In Greater Helsinki, the average price of old dwellings dropped 3.95% to €4,577 (US$5,011) per sq. m. during the year to Q3 2023 and fell by a bigger 9.27% in real terms. It was the region’s fifth consecutive y-o-y price decline. Quarter-on-quarter, prices in the capital were down by 3.17% (-3.64% inflation-adjusted) during the latest quarter.

In the rest of the country, prices fell by 0.1% (-5.64% inflation-adjusted) y-o-y to €1,936 (US$2,119) per sq. m. Quarterly, prices outside the capital area increased slightly by 0.73% (0.25% inflation-adjusted) in Q3 2023.

Yet the trend varies by property type:

  • The average price of terraced houses fell by 5.33% (-10.57% inflation-adjusted) y-o-y to €2,097 (US$2,296) per sq. m. in Q3 2023, in contrast to a 2.4% increase in Q3 2022. Quarter-on-quarter, prices fell by 4.64% (-5.1% inflation-adjusted) during the latest quarter.
  • Prices of blocks of flats were up by a modest 2.52% (but declined by 3.16% inflation-adjusted) to €3,051 (US$3,340) per sq. m. during the year to Q3 2023, an improvement from a y-o-y fall of 2.27% a year earlier. Quarterly, prices dropped 1.61% (-2.08% inflation-adjusted) in Q3 2023.

Finland Annual Change of Average Prices by Property Type graph

Demand is plummeting, amidst high inflation and rising interest rates. In the first three quarters of 2023, the total transactions of old dwellings in Finland fell sharply by 47.5% to 30,277 units as compared to the same period last year, following a decline of 14.8% in the full year of 2022 and y-o-y rises of 16.1% in 2021, 12.7% in 2020 and 1.4% in 2019, according to Statistics Finland.

Over the same period, sales transactions plunged by 46.3% in Greater Helsinki and by 48% 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 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 48.6% and 32.9% y-o-y, respectively, during the first three quarters of 2023. In contrast, dwelling completions rose by 9.9% over the same period.

Overall, Finland’s housing market is projected to remain weak in the medium term, as it faces considerable headwinds. Financial services group Nordea expects house prices in the whole country to fall by 6% for the full year of 2023 and by 8% in the Greater Helsinki Area. This is in line with the forecast released by the Mortgage Society of Finland Hypo, which showed that house prices across the country will fall by an average of 7% this year, and by 8% in the capital. This will mark the biggest drop in house prices since 1993.

Finland’s economy is now struggling, as the increase in consumer prices and interest rates, coupled with weaker export demand, are weighing on economic activity. In Q3 2023, the Finnish economy contracted by 1% from a year earlier, following a y-o-y decline of 0.4% in Q2 and zero growth in Q1, based on figures from Statistics Finland. It now marked the biggest fall since Q1 2021. Quarterly, the economy shrunk by 0.9% in Q3 2023, after growing by 0.6% in Q2 and 0.3% in Q1.

Against this backdrop, the Bank of Finland expects the economy to contract by 0.2% this year and to grow by a minuscule 0.2% in 2024.

A history of extreme house price cycles

From 1980 to Q1 2009, the country experienced several dramatic house-price cycles. The volatility of house prices in Finland has 3 main causes:

  • the export-oriented economy’s sensitivity to global shocks;
  • the housing market’s high interest rate sensitivity. In 1994, about 70% of new mortgages were variable rate. Since 2001, more than 90% of new mortgages have been variable rates, taking advantage of historic low interest rates from 2003 to 2006.
  • an insufficiently responsive supply side. Finland’s long housing boom was encouraged by a decade of under-building. Less than 30,000 dwellings were completed annually from 1994 to 1999, down from 40,000 units from 1983 to 1991 (with a peak level of 65,397 units in 1990).
INFLATION-ADJUSTED PRICE CHANGE OF EXISTING DWELLINGS, 1983-2022
Periods Finland Helsinki Rest of Finland
1983-1989 64.0% 68.5% -
1989-1993 -49.2% -53.4% -44.4%
1993-1994 6.6% 10.3% 3.2%
1994-1995 -4.8% -6.3% -1.9%
1995-1999 45.0% 62.8% 38.0%
1999-2001 -6.9% -5.5% -12.0%
2001-Q2 2008 42.0% 45.7% 33.4%
Q2 2008-Q1 2009 -6.4% -8.6% -4.0%
2010-2019 -3.6% 5.8% -8.2%
2019-2021 6.0% 10.1% 3.6%
2022 (y-o-y) -13.6% -11.8% -11.1%
Sources: Global Property Guide, Statistics Finland

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. The result is a strong increase in house prices. From 2001 to Q2 2008, house prices in Finland rose by 42% and by almost 46% in Greater Helsinki, in inflation-adjusted terms. Then the global crisis caused real house prices to decline by about 6.4% from Q2 2008 to Q1 2009.

From 2010 to 2019, real house prices in Greater Helsinki rose by 5.8% but declined by 8.2% in the rest of the country. Surprisingly, the housing market has remained stable in recent years, despite the Covid-19 pandemic. From 2019 to 2021, nationwide house prices rose by 6%, in inflation-adjusted terms. Real house prices increased by 10.1% in Greater Helsinki and by a modest 3.6% in the rest of the country. However, inflation-adjusted house prices nationwide plunged 13.6% in 2022, mainly due to falling demand amidst high inflation and sharply rising interest rates.

Finland Average Prices of Dwellings graph

Residential construction activity mixed

Residential construction activity showed mixed results, amidst the combined impact of increasing borrowing costs and rising construction material prices. During the first three quarters of 2023:

  • Dwelling permits in residential buildings plunged by 48.6% y-o-y to 15,653 units in Q1-Q3 2023, following an annual decline of 17.8% in 2022 and increases of 9.9% in 2021 and 5.8% in 2020, according to Statistics Finland.
  • Dwelling starts also fell sharply by 32.9% to 19,924 units, following a decline of 19.9% in 2022 and increases of 18.5% in 2021 and 7.2% in 2020.
  • Dwelling completions, on the other hand, rose by 9.9% to 30,976 units from the same period last year, following increases of 11.5% in 2022 and 4% in 2021, and a decline of 9.1% in 2020.

Currently, there are over 3 million dwellings in Finland.

Finland Dwelling Completions graph

Property transactions plummeting

Demand is now falling rapidly again, amidst high inflation and rising interest rates. In the first three quarters of 2023, the total transactions of old dwellings in Finland fell sharply by 47.5% to 30,277 units as compared to the same period last year, following a decline of 14.8% in the full year of 2022 and y-o-y rises of 16.1% in 2021, 12.7% in 2020 and 1.4% in 2019, according to Statistics Finland.

Over the same period:

  • In Greater Helsinki, transactions for old dwellings were down 46.3% y-o-y to 8,825 units, after falling by 16.5% during 2022 and rising by 11.9% in 2021 and 12.4% in 2020.
  • In the rest of the country, transactions for old dwellings dropped 48% y-o-y to 21,393 units in the first three quarters of 2023, following a fall of 14.2% in 2022 and increases of 17.8% in 2021 and 13.8% in 2020.

By property type:

  • For terraced houses, transactions plunged by 48.5% y-o-y to 9,099 units during the first three quarters of 2023, after falling by 18.7% during 2022 and increasing by 14.4% in 2021 and 15.8% in 2020.
  • For blocks of flats, transactions fell sharply by 47% y-o-y to 21,153 units, following an annual drop of 12.9% in 2022 and growth of 16.9% in 2021 and 11.8% in 2020.

Finland Transactions of Old Dwellings graph

Mortgage interest rates rising rapidly

Finland’s new housing loan interest rates rose to 4.37% in September 2023, sharply up from 2.54% a year earlier and 0.74% two years ago, according to the Bank of Finland.

For new housing loans, in September 2023:

  • Up to 1-year initial rate fixation (IRF): 4.38%, sharply up from 2.52% in the previous year and 0.73% two years earlier
  • Over 1-year IRF: 3.66%, up from 3.06% in September 2022 and 1.29% in September 2021

For outstanding housing loans, the average interest rate was 3.86% in September 2023, far higher than the 1.31% a year earlier and 0.79% two years ago. Over the same period:

  • Up to 1-year maturity: 4.35%, sharply up from 1.29% a year ago and 0.62% two years earlier
  • Over 1 and up to 5 years maturity: 4.05%, up from 1.29% in the previous year and 0.8% two years ago
  • Over 5 years maturity: 3.85%, up from 1.31% a year earlier and 0.79% two years ago

The abrupt increase in loan rates is mainly attributed to the European Central Bank’s move to raise its key rate to rein in inflationary pressures. In September 2023, the ECB raised its repo rate further by 25 basis points to 4.50% - its tenth consecutive rate hike since July 2022 when the key rate was just 0.0%. It is now the highest level since April 2001.

Finland Interest Rate Percentage graph

Mortgage market slowing

Finland’s mortgage market has enjoyed strong growth during the past two decades, with outstanding mortgage loans rising from 16.2% of GDP in 1995 to 43.5% of GDP in 2015, according to the Global Property Guide estimates. 

However, the mortgage market has been more or less steady in recent years, amidst the economic repercussions brought by the Covid-19 pandemic. As a percentage of GDP, the size of the mortgage market stood at 42.6% in 2021, from 41.5% in 2019 and 42.5% in 2017.

During 2022, the mortgage market was equivalent to about 40.4% of the country’s GDP, indicating that the overall economy grew faster than housing loans. This is not surprising given the rapid increase in interest rates.

Housing loan growth averaged 2.3% annually from 2013 to 2022, a sharp slowdown from annual expansions averaging 6.8% in 2008-12 and 14.4% in 2001-7.

In September 2023, the total amount of housing loans outstanding fell by 1.9% y-o-y to €106.72 billion (US$116.85 billion), according to the Bank of Finland.

Finland Housing Loans Outstanding graph

Low to moderate rental yields, rising rents

Rental apartments have low to moderate returns, with gross rental yields in the country averaging 4.24% in Q3 2023, according to a Global Property Guide research conducted in September 2023.

In Helsinki, rental apartment returns are even lower, ranging from 2.84% to 4.7%, with a city average of 3.8% in Q3 2023. Smaller apartments have typically higher yields.

Despite the complete deregulation of the private rental market in 1995, private rents are still distorted by the large social housing sector. From 2001 to 2007, house prices in Finland rose by around 50%, while private rental prices trailed with a growth of only 17%. In Helsinki, house prices rose 55% while private rents rose by only 12%, leading to relatively low rental yields.

Rents continue to rise modestly. The average monthly rent in Finland was €15.02 (US$16.45) per sq. m. in Q3 2023, up by 2.2% from the previous year, according to Statistics Finland. Private rents rose by 2.3% to €16.35 (US$17.90) per sq. m., while rents on government-subsidized houses increased 3.4% to €12.53 (US$13.72) per sq. m.

Greater Helsinki rents were up slightly by 0.9% y-o-y to €18.30 (US$20.04) per sq. m. in Q3 2023. Private rents were around €20.86 (US$22.84) per sq. m., comparably higher than government-subsidized rents, averaging €13.92 (US$15.24) per sq. m.

In Q3 2023, average rents of government-subsidized dwellings were about 33% lower than private rents in Helsinki, and 23% cheaper in Finland as a whole.

Finland Private Residential Rents graph

The Finnish tax system still privileges owner-occupation. 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.

Around 32% of all dwellings in Finland are currently rented. Out of those, 61% are privately rented, while 39% are government-subsidized.

Finland’s economy is in mild recession, says the Bank of Finland

According to the Bank of Finland’s September 2023 Interim Forecast, the economy is now in a mild recession, as the increase in consumer prices and interest rates, coupled with weaker export demand, are weighing on economic activity. 

In Q3 2023, the Finnish economy contracted by 1% from a year earlier, following a y-o-y decline of 0.4% in Q2 and zero growth in Q1, based on figures from Statistics Finland. It now marked the biggest fall since Q1 2021. Quarterly, the economy shrunk by 0.9% in Q3 2023, after growing by 0.6% in Q2 and 0.3% in Q1.

“The Finnish economy is in a mild recession. The rise in prices and interest rates, and weaker export demand, are weighing on the economy, and recovery from the recession will be slow,” said the Bank of Finland. “The favorable trend in employment is coming to a halt. Domestic inflation is slowing rapidly. However, the economic recovery will take longer than previously estimated. Risks surrounding the global economy have increased, and if growth falls short of forecasts, this would also affect domestic output. The slowdown in residential construction could also cause longer-term problems.”

Against this backdrop, the Bank of Finland expects the economy to contract by 0.2% this year and to grow by a minuscule 0.2% in 2024. The European Commission is a bit more optimistic, projecting the Finnish economy to register a meager growth of 0.1% this and 0.8% next year.

“After expanding in the first half of 2023, GDP is expected to contract in the second half of the year on the back of higher financing costs and weak private consumption. Real GDP is projected to grow only by 0.1% in 2023 and gradually accelerate to 0.8% in 2024,” said the European Commission.

Finland GDP Growth and Inflation graph

Finland’s economy grew by 3.2% in 2021 and by another 1.6% in 2022 to fully offset the 2.4% contraction it suffered in 2020 due to the imposition of strict coronavirus-related measures.

But even before the Covid-19 pandemic, the economy had its ups and downs. 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 0.9% and 0.4%, respectively.

In 2015, the economy, although freed from recession, barely grew. During the same year, Finland was named the weakest economy in the eurozone, 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 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.

In the succeeding years, Finland logged a more decent economic growth of 2.8% in 2016, 3.2% in 2017, 1.1% in 2018 and 1.2% in 2019.

The labor market is weakening. In October 2023, the nationwide unemployment rate was 6.8%, up from 5.8% in the same period last year, according to Statistics Finland. Yet it remains far lower than the country’s jobless rate average of 8% annually in the past decade.

There were 190,000 unemployed persons in October 2023, sharply up from just 162,000 from a year earlier.

Consumer price increases are moderating. In October 2023, annual inflation eased to 4.9%, down from 5.5% in the previous month and 8.3% a year earlier. It is now the lowest level since February 2022. Overall inflation averaged 0.7% from 2014 to 2020, before rising to 2.1% in 2021 and 7.2% in 2022.

Finland’s budget deficit fell back to a manageable level of about 2.8% of GDP in 2021, after it surged to 5.6% of GDP in 2020 due to the government’s introduction of massive stimulus packages to boost economic activity amidst the pandemic. The deficit improved further to just 0.8% of GDP in 2022.

Yet the shortfall is expected to widen again to about 2.4% of GDP this year and further to 3.2% of GDP in 2024, based on European Commission forecasts.

“The general government deficit is expected to increase to 2.4% of GDP in 2023, due to the slowdown in economic growth and to already planned expenditures, mainly in the field of national defense and border-guard spending,” said the European Commission. “The general government deficit is forecast to widen further to 3.2% of GDP in 2024 when a decrease in revenue is foreseen as a result of changes in social security contributions.”

As a result, Finland’s debt-to-GDP ratio is projected to increase to around 74.3% in 2023 and to 76.9% in 2024, from 73.3% in 2022 and 72.5% in 2021.

Finland General Government Budget Balance and Public Debt graph

Sources: