Finnish housing market strengthening
Lalaine C. Delmendo | January 17, 2022
Finland’s housing market continues to strengthen despite the pandemic. The average price of old dwellings in Greater Helsinki rose by 6.68% (4.38% inflation-adjusted) to €4,137 (US$ 4,683) per square metre (sq. m.) during the year to Q3 2021, following y-o-y rises of 6.08% in 2020, 0.76% in 2019, 3.26% in 2018 and 2.04% in 2017, according to Statistics Finland. Quarter-on-quarter, prices increased slightly by 0.53% (-0.07% inflation-adjusted) in Q3.
By property type:
- The average price of terraced houses in Greater Helsinki rose strongly by 9.04% (6.69% inflation-adjusted) y-o-y to €3,728 (US$4,220) per sq. m. in Q3 2021.
- Prices of blocks of flats were up 5.28% (3.02% inflation-adjusted) to €4,404 (US$4,985) per sq. m. during the year to Q3 2021.
In the rest of the country, the average price of old dwellings increased by a more modest 2.86% (0.64% inflation-adjusted) to €1,654 (US$ 1,872) during the year to Q3 2021.
Demand remains robust, fueled by very low interest rates. In the first three quarters of 2021, total transactions of old dwellings rose strongly by 17.5% y-o-y to 60,033 units, following a growth of 11.8% during 2020, according to Statistics Finland. Sales transactions increased 13.1% in Greater Helsinki and by 19.3% in the rest of the country.
Dwelling permits and starts rose by 16.1% and 23.5% y-o-y, respectively, during the first three quarters of 2021. In contrast, dwelling completions fell by 6.6% over the same period.
Finland’s economy is expected to grow by 3.5% this year, after registering annualized growth of 7.5% in Q2 and 4% in Q3 2021, according to the Bank of Finland. The economy contracted by 2.9% last year, its worst performance since 2009, due to the imposition of strict coronavirus-related measures.
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.
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 rate, 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 on 40,000 units annually from 1983 to 1991 (with a peak level of 65,397 units in 1990).
|INFLATION-ADJUSTED PRICE CHANGE OF EXISTING DWELLINGS, 1983-Q3 2021|
|Periods||Finland||Helsinki||Rest of Finland|
|Q2 2008-Q1 2009||-6.4%||-8.6%||-4.0%|
|Q4 2019-Q3 2021||5.8%||9.3%||4.2%|
|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. Result: 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 actually declined by 8.2% in the rest of the country. Surprisingly, the housing market has been gaining momentum recently, despite the COVID-19 pandemic. From Q4 2019 to Q3 2021, house prices in both Greater Helsinki and the rest of the country rose by 9.3% and 4.2%, respectively, also in inflation-adjusted terms.
Residential construction mixed
Residential construction activity is mixed, amidst the global pandemic. During 2020:
- Dwelling permits increased 5.5% to 41,247 units, in contrast to y-o-y declines of 11.6% in 2019 and 9.8% in 2018, according to Statistics Finland.
- Dwelling starts rose by 9.8% to 40,905 units, a sharp improvement from annual declines of 16.1% in 2019 and 0.3% in 2018.
- Dwelling completions, on the other hand, fell by 9.1% to 39,057 units, following almost steady activity in 2019 and a strong growth of 20% in 2018.
The trend continued this year, with dwelling permits and starts rising by 16.1% and 23.5% y-o-y, respectively, during the first three quarters of 2021. In contrast, dwelling completions fell by 6.6% over the same period.
Currently, there are currently over 3 million dwellings in Finland.
Property transactions rising strongly
Demand remains robust, fuelled by very low interest rates. In the first three quarters of 2021, total transactions of old dwellings rose strongly by 17.5% y-o-y to 60,033 units, following an 11.8% increase in 2020, according to Statistics Finland. Over the same period:
- In Greater Helsinki, transactions for old dwellings increased 13.1% y-o-y to 17,678 units, after rising by 12.5% during 2020
- In the rest of the country, transactions for old dwellings rose by 19.3% y-o-y to 42,041 units, after an 11.9% growth in 2020
By property type:
- For terraced houses, transactions rose by 16% y-o-y to 19,488 units during the first three quarters of 2021, after increasing by 16.5% during 2020
- For blocks of flats, transactions rose by 18.4% y-o-y to 40,373 units, following a 9.6% growth in 2020
Interest rates remain very low
Finland’s new housing loan interest rates are still very low at 0.74% in September 2021, slightly down from 0.75% in the previous year, according to the Bank of Finland.
For new housing loans:
- Up to 1 year initial rate fixation (IRF): 0.73%, slightly down from 0.74% a year earlier
- Over 1 year IRF: 1.29%, down from 1.5% a year earlier
For outstanding housing loans, the average interest rate was 0.79% in September 2021, down from 0.86% a year earlier.
- Up to 1 year maturity: 0.62%, down from 0.69% a year ago
- 1-5 years maturity: 0.8%, down from 0.93% in the previous year
- Over 5 years maturity: 0.79%, down from 0.86% a year earlier
The continued decline in loan rates is mainly attributed to the European Central Bank’s (ECB) reduction of its key rate to a record-low of 0.00% in March 2016, where it has remained since.
Mortgage market continues to growth, albeit at slower pace
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. After declining slightly in the past three years, the size of the mortgage market increased again to about 43.9% of GDP in 2020, mainly due to economic contraction brought by the pandemic.
Housing loan growth averaged 2.3% annually from 2013 to 2020, a sharp slowdown from annual expansions averaging 6.8% in 2008-12 and 14.4% in 2001-7.
During 2020, the total amount of housing loans outstanding stood at €103.6 billion (US$117.3 billion), up by 3.2% from a year earlier, according to the Bank of Finland.
Low to moderate rental yields
Rental apartments have low to moderate returns, with gross rental yields in Helsinki ranging from 2.86% to 4.11%, according to a Global Property Guide research.
Smaller apartments in Helsinki ranging from 60 sq. m. to 90 sq. m. have rental yields around 4.03% and 3.68%, respectively. Larger apartments of approximately 120 sq m. to 200 sq. m. have average rental yields of 3.49%.
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 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.
Rents continue to rise modestly. The average monthly rent in Finland was €14.18 (US$16.05) per sq. m. in Q3 2021, up by 1.5% from the previous year, according to Statistics Finland. Private rents rose by 1.1% to €15.3 (US$17.32) per sq. m., higher than the 0.9% increase to €11.94 (US$13.52) per sq. m. on government-subsidized rents.
Greater Helsinki rents were up by 1% y-o-y to €17.83 (US$20.18) per sq. m. in Q3 2021. Private rents were around €20.34 (US$23.02) per sq. m., comparably higher than government-subsidized rents, averaging at €13.42 (US$15.19) per sq. m. In Q3 2021, average rents of government-subsidized dwellings are about 34% lower than private rents in Helsinki, and 22% cheaper in Finland as whole.
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 recovering
The Finnish economy grew by 4% in Q3 2021 from a year earlier, following a 7.5% expansion in Q2. With the economy’s stronger-than-expected performance recently, it is now expected to return to growth this year, with a projected real GDP growth of 3.5%, according to the Bank of Finland. This is at par with the European Commission’s 2021 forecast of a 3.4% economic growth for Finland.
“In spring 2021, economic growth was much stronger than expected, and both business and household confidence has improved in step with the progress of vaccinations and lifting of restrictions. GDP growth is projected at 3.5% in 2021 and 2.8% in 2022,” said Bank of Finland.
“The major downside risks to economic growth are still related to the COVID-19 pandemic,” the bank added.
The economy contracted by 2.9% last year, 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.
The labour market is now returning to its pre-pandemic levels. In October 2021, the nationwide unemployment rate fell to 6%, from 7.4% in the previous year, according to Statistics Finland.
There were 164,000 unemployed persons in October 2021, down by 37,000 from a year earlier.
Finland’s budget deficit surged to 5.5% of GDP in 2020. The deficit is expected to fall to 2.4% in 2022, according to the European Commission.
Finland’s debt-to-GDP ratio increased to 69.5% last year, a sharp increase from just 59.5% in 2019. Public debt is expected to rise further to 71.2% of GDP this year.
Inflation accelerated to 3.2% in October 2021, the highest level since January 2012, mainly caused by higher costs of housing and utilities, as well as transport, according to Statistics Finland. Overall inflation averaged 0.7% from 2014 to 2020.
- Prices of dwellings in housing companies (Statistics Finland): https://www.stat.fi/til/ashi/index_en.html
- Prices of old dwellings in housing companies rose in the biggest towns in third quarter (Statistics Finland): https://www.stat.fi/til/ashi/2021/09/ashi_2021_09_2021-10-28_tie_001_en.html
- Deposit and lending rates in Finland (Bank of Finland): https://www.suomenpankki.fi/en/Statistics/mfi-balance-sheet/tables/rati-taulukot-en/talletusten_ja_lainojen_korot_en/
- Construction (Statistics Finland): https://www.stat.fi/tup/suoluk/suoluk_rakentaminen_en.html
- Non-subsidised rents increased in July to September (Statistics Finland): https://www.stat.fi/til/asvu/2021/03/asvu_2021_03_2021-10-21_tie_001_en.html
- Financing and Insurance (Statistics Finland): https://www.stat.fi/tup/suoluk/suoluk_rahoitusmarkkinat_en.html#Loans%20granted%20to%20households%201)%20on%2031%20December
- Rents for government subsidised rental dwellings, 3rd quarter 2021 (Statistics Finland): https://www.stat.fi/til/asvu/2021/03/asvu_2021_03_2021-10-21_tau_001_en.html
- Cubic volume covered of granted building permits lower in July to September than one year earlier (Statistics Finland): https://www.stat.fi/til/ras/2021/09/ras_2021_09_2021-11-23_tie_001_en.html
- Apartment yields in Helsinki are moderate (Global Property Guide): https://www.globalpropertyguide.com/Europe/Finland/Rental-Yields
- Economic forecast for Finland (European Commission): https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-performance-country/finland/economic-forecast-finland_en
- Economy recovering apace (Bank of Finland): https://www.bofbulletin.fi/en/2021/articles/economy-recovering-apace/
- Growth in employment strengthened in October (Statistics Finland): https://www.stat.fi/til/tyti/2021/10/tyti_2021_10_2021-11-23_tie_001_en.html
- Inflation 3.2 per cent in October (Statistics Finland): https://www.stat.fi/til/khi/2021/10/khi_2021_10_2021-11-15_tie_001_en.html