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Finland: house prices up slightly in Helsinki, but rest of the country slows

Last Updated: February 11, 2018

Finland house pricesHouse prices in the capital city, Helsinki, continue to rise, amidst record-low interest rates and improving economic conditions.

The average price of old dwellings in Greater Helsinki increased by 3.33% (2.56% inflation-adjusted) to €3,753 (US$ 4,673) per square metre (sq. m.) during 2017, according to Statistics Finland. The average price of blocks of flats rose by 4.37% to €3,992 (US$ 4,970) per sq. m. The average price of terraced houses rose by 1.22% to €3,322 (US$ 4,136) per sq. m.

In the rest of the country, the average price of old dwellings increased slightly by 0.41% (-0.34% inflation-adjusted) to €1,708 (US$ 2,127) during 2017. Flats had average prices of €1,718 (US$ 2,139) per sq. m., up by 1.12% y-o-y. Terrace houses, on the other hand, had a slight price drop of 0.29% y-o-y to an average price of €1,697 (US$ 2,113) per sq. m.

Overall, the average price of old dwellings in Finland rose by 1.87% y-o-y (1.11% inflation-adjusted) to around €2,341 (US$ 2,915) per sq. m.

The primary market also follows this general trend with new dwelling prices in the whole country rising by 1.9% (1.2% inflation-adjusted) to €3,658 (US$ 4,545) per sq. m. in 2017. New dwelling prices in Helsinki rose by 3% (2.7% inflation-adjusted) while they increased by just 1.3% (0.6% inflation-adjusted) in the rest of the country.

"Smaller family sizes, better employment opportunities and growing interest in an urban lifestyle are driving people into cities," said Danske Bank. "Growth in housing demand has raised prices and caused a construction boom in Helsinki and a few other towns, while the real estate market in the rest of the country has remained more or less flat or is even declining."

Residential construction activity is surging. During the first eleven months of 2017, dwelling permits issued for residential buildings rose by 16% to 42,836 units from a year earlier, according to Statistics Finland. Over the same period, dwelling starts surged 21.4% while completions were up by 18.9%.

Finland is expected to see a two-tier housing market this year, with Helsinki and other major cities projected to continue to register robust house price rises. House prices will increase in Helsinki (3%), Kokkola (2.4%), Tampere (1.6%), Espoo (1.6%), and Turku (1.5%), according to real estate firm Kiinteistömaailma, but will fall in Pieksämäki (-3.8%), Salo (-2.9%), Mänttä-Vilppula (-2.2%), Parainen (-2.0%) and Heinola (-1.8%).

After a three-year recession, the Finnish economy expanded by 3.1% in 2017, according to the Bank of Finland. The economy is expected to expand by a modest 2.5% this year.

A history of extreme house price cycles

From 1980 to Q1 2009, the country experienced several dramatic house-price cycles:

The relative 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

  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 - 2017 12.4% 18.9% 6.5%
Source: Statistics Finland, Global Property Guide

Finland average price dwellings

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 interest rate drop has lead to a surge in housing demand during the period, resulting to strong increase in house prices. From 2001 to Q2 2008, house prices in Finland rose by 42% and by almost 46% in Greater Helsinki.

However, similar to other developed countries, Finland was also adversely affected by the global crisis, which caused house prices to decline by about 6.4% from Q2 2008 to Q1 2009. The housing market bounced back quickly but house price rises have been modest since. From 2010 to 2017, house prices in Greater Helsinki rose by 18.9% and by just 6.5% in the rest of the country.

Residential construction activity rising strongly

Finland dwellings completed

During the first eleven months of 2017, the number of dwelling permits issued for residential buildings rose by 16% to 42,836 units from the same period last year, according to Statistics Finland. Permits for blocks of flats surged 21.6%, while permits for detached houses rose by a modest 2.4%.

Dwelling starts from January to November 2017 were 42,007 units, up 21.4% from the previous year. Blocks of flats housing had a sharp increase of 29.3% while detached houses starts increased by just 2.4% during the same period.

Dwelling completions soared 18.9% y-o-y to 31,163 units from January to November 2017. Blocks of flats completions rose strongly by 29.1% while detached houses completions had a modest rise of 4.4%.

Finland's long housing boom has been 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). From 2000 to 2016, dwelling completions averaged 30,800 units per year.

Currently, there are about 3 million dwellings in Finland.

Property transactions falling

Finland dwellings transactions

In 2017, total transactions of old dwellings fell by 2.4% y-o-y to 59,760 units, according to Statistics Finland.

  • In Greater Helsinki, transactions for old dwellings dropped 2.56% y-o-y to 17,420 units in 2017.
  • In the rest of the country, transactions for old dwellings fell by 2.33% y-o-y to 42,340 units last year.

Record-low interest rates

Finland interest housing loan rates

Finland's housing loan interest rates are still at historic lows at 1.02% in November 2017, slightly down from 1.08% the previous year and 1.26% two years ago, according to the Bank of Finland.

In November 2017:

  • Up to 1 year maturity: 1.07%, down from 1.23% a year ago
  • 1-5 years maturity: 1.24%, down from 1.36% a year ago
  • Over 5 years maturity: 1.02%, down from 1.07% 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 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 43.9% of GDP in 2015, according to the Bank of Finland. From 1998 to 2007, outstanding housing loans experienced double-digit annual expansions averaging around 14%.

Finland outstanding housing loans

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 very strong.

However, the mortgage market has been slowing in recent years, despite record-low interest rates. From 2013 to 2017, housing loans increased by just 2.2%, on average, every year - far from the average annual growth of 6.8% from 2008 to 2012 and 14% from 1998 to 2007. In fact, the size of the mortgage market declined slightly to 43.6% of GDP in 2016 and to 43.1% of GDP in 2017, indicating that the overall economy is growing faster than the mortgage market.

Low to moderate rental yields

Finland dwelling prices rents

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%.

Rents continue to rise modestly. The average monthly rent in Finland was €12.97 (US$ 16.14) per sq. m. in Q3 2017, up by 2% from the previous year, according to Statistics Finland. Private rents rose by 2.6% to €14.02 (US$ 17.44) per sq. m., higher than the 1.2% increase to €11.72 (US$ 14.58) per sq. m. on government-subsidized rents.

Greater Helsinki rents were up by 2.6% y-o-y to €15.95 (US$ 19.85) per sq. m. in Q3 2017. Private rents were around €18.56 (US$ 23.09) per sq. m., comparably higher than government-subsidized rents, averaging at €12.99 (US$ 16.16) per sq. m.  In Q3 2017, average rents of government-subsidized dwellings are 30% lower than private rents in Helsinki, and 16% cheaper in Finland as whole.

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.

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 31.2% of all dwellings in Finland are currently rented. Out of those, 61% are privately rented, while 39% are government-subsidized.

Economy improving

Finland gdp inflation

The Finnish economy expanded by 3.1% in 2017, amidst strong private consumption and growing employment, according to the Bank of Finland. It was the fastest growth since 2007.

The economy is expected to expand by a modest 2.5% this year, based on the central bank forecast.

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 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.

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. In June 2016, a Competitiveness Pact was signed to reduce labour costs. The agreement includes the following conditions, which mostly are effective in 2017:

  • A wage freeze for one year;
  • An increase of 24 hours in the annual working time (still without raising wages);
  • A higher share of social security payments to employees; and
  • A reduction of holiday bonuses in the public sector.

The government pledged income tax concessions for participating employers worth approximately around €315 million (US$391 million) to €515 million (US$640 million).

As a result, exports grew faster than imports. The value of goods exports grew by 12% in November 2017 from a year earlier to €5.2 billion (US$6.46 billion) while imports increased by 8%.

In 2017, Finland's unemployment rate fell to 8.6%, from 8.8% a year earlier, according to Statistics Finland. Finland's jobless rate is projected to fall to 8.3% this year and to 8% in 2019, according to the ECB.

Finland's budget deficit stood at 1.4% of GDP last year, down from 1.7% in 2016. The deficit is expected to fall further to 1.2% of GDP this year and to 0.8% of GDP in 2019. Finland's debt-to-GDP ratio is expected to fall slightly to 62.1% this year, from 62.7% last year.

Overall inflation is expected to accelerate to 1.3% this year and to 1.7% in 2019, according to ECB.

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