Coronavirus hits an already weak Finnish housing market.
Lalaine C. Delmendo | April 29, 2020
The Finnish government has unveiled a €4.1 billion (US$4.4 billion) coronavirus bailout. This largest ever emergency budget in Finland’s history. The new package comes on top of a measure announced in March 2020, amounting to around €500 million (US$541 million). A third round of funding is expected in May.
The economy is projected to contract sharply this year, mainly due to repercussions of the coronavirus pandemic and the measures taken to prevent it from spreading.
Finland’s housing market was already slowing in 2019. The average price of old dwellings in Greater Helsinki increased by a meager 0.84% (0.07% inflation-adjusted) to €3,704 (US$ 4,000) per square metre (sq. m.) during 2019, a slowdown from y-o-y rises of 3.26% in 2018, 2.04% in 2017, and 2.74% in 2016, according to Statistics Finland.
- The average price of blocks of flats in Greater Helsinki rose by 1.49% to €3,961 (US$4,277) per sq. m. in 2019.
- Terraced house prices dropped slightly by 0.21% to €3,313 (US$3,577) per sq. m. in 2019.
However in the rest of the country, the average price of old dwellings fell by 2.31% (-3.07% inflation-adjusted) to €1,563 (US$ 1,688) during 2019.
The primary market is much more vibrant with new dwelling prices in the whole country rising by 5.98% (5.16% inflation-adjusted) to €4,627 (US$ 4,996) per sq. m. during 2019. New dwelling prices in Helsinki rose strongly by 9.71% (8.86% inflation-adjusted) to €5,739 (US$ 6,197) per sq. m. while they increased by a modest 2.21% (1.42% inflation-adjusted) to €3,879 (US$4,188) in the rest of the country.
Demand remains robust. In 2019, total transactions of old dwellings rose by 3.7% y-o-y to 63,073 units, according to Statistics Finland. Over the same period, transactions increased 5.4% in Greater Helsinki and rose by 2.1% in the rest of the country.
Finland’s economy grew by about 1% in 2019, a slowdown from the previous year’s 1.7% growth and the lowest growth in four years.
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 - 2019
|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%|
|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 house prices to decline by about 6.4% from Q2 2008 to Q1 2009.
From 2010 to 2019, house prices in Greater Helsinki rose by 5.8% but actually declined by 8.2% in the rest of the country.
Residential construction activity weakens
Dwelling completions increased 20% in 2018, and by 1% to 42,695 units in 2019, according to Statistics Finland. The decline in dwelling permits in 2019 by 13.7% to 37,255 units was really a kind of reversion-to-normal. Permits for blocks of flats dropped 12.9%, while permits for detached and semi-detached houses fell by 15.1%.Likewise dwelling starts were down 13.1% last year to 38,770 units as compared to the previous year.
Currently, there are currently over 3 million dwellings in Finland.
Property transactions continue to rise
Demand remains robust, fuelled by very low interest rates. During 2019, total transactions of old dwellings rose by 3.7% y-o-y to 63,073 units, according to Statistics Finland. Over the same period:
- In Greater Helsinki, transactions for old dwellings increased 5.4% y-o-y to 18,489 units.
- In the rest of the country, transactions for old dwellings rose by 2.1% y-o-y to 43,751 units.
By property type:
- For terraced houses, transactions rose by 1.5% y-o-y to 19,733 units during 2019.
- For blocks of flats, transactions rose by 4.9% y-o-y to 43,117 units over the same period.
Interest rates remain very low
Finland’s new housing loan interest rates are still very low at 0.77% in February 2020, down from 0.85% in the previous year and 0.93% two years ago, according to the Bank of Finland.
For new housing loans:
- Up to 1 year initial rate fixation (IRF): 0.75%, down from 0.83% a year earlier and 0.91% two years ago
- Over 1 year IRF: 1.4%, down from 1.82% a year earlier and 1.85% two years ago
For outstanding housing loans, the average interest rate was 0.89% in February 2020, down from 0.97% a year earlier and 1.01% two years ago.
- Up to 1 year maturity: 0.73%, down from 0.87% a year ago and 1.02% two years ago
- 1-5 years maturity: 0.99%, down from 1.1% in the previous year and 1.23% two years ago
- Over 5 years maturity: 0.89%, down from 0.97% a year earlier and 1.01% two years ago
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 growth 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 43.8% of GDP in 2015, according to the Global Property Guide estimates.
But the size of the mortgage market declined slightly to 42.9% of GDP in 2017, to 42.1% in 2018, and to 41.9% in 2019.
Housing loan growth averaged 2.2% annually from 2013 to 2019, a sharp slowdown from annual expansions averaging 6.8% in 2008-12 and 14.4% in 2001-7.
In February 2020, the total amount of housing loans outstanding stood at €100.54 billion (US$108.96 billion), up by 2.7% 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 €14.03(US$15.21) per sq. m. in Q4 2019, up by 2.3% from the previous year, according to Statistics Finland. Private rents rose by 2.9% to €15.2 (US$16.47) per sq. m., higher than the 1.3% increase to €11.81 (US$12.8) per sq. m. on government-subsidized rents.
Greater Helsinki rents were up by 2.6% y-o-y to €17.28 (US$18.73) per sq. m. in Q4 2019. Private rents were around €19.78 (US$21.44) per sq. m., comparably higher than government-subsidized rents, averaging at €13.18 (US$14.28) per sq. m. In Q4 2019, average rents of government-subsidized dwellings are about 33% 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 to contract sharply in 2020
The economy is expected to contract sharply this year, with an estimated real GDP decline of 5.5%, due to the coronavirus pandemic, according to the Ministry of Finance. The government has imposed strict measures to restrict movement.
The Finnish economy expanded by about 1% in 2019, a slowdown from the prior year’s 1.7% growth, amidst weaker global economic activity, based on figures from Statistics Finland. It was the lowest growth in four years.
“Everything depends on how deeply the economy plunges and how long it stays there,” said Mikko Spolander of the Ministry of Finance. “The danger is that the longer the economy suffers, the greater the difficulty in reviving it.”
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 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 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.
Finland’s unemployment rate rose to 7.3% in March 2020, from 6.9% in the previous month and 7% a year earlier, according to Statistics Finland.
Recently, the government unveiled a €4.1 billion (US$4.4 billion) coronavirus bailout – the largest ever emergency budget in Finland’s history. Support for businesses and workers will be raised by €1 billion (US$1.1 billion), while about €600 million (US$649 million) will be spent for the purchase of medical supplies, medicines and protective equipment. The new package comes on top of the measure announced in March 2020, amounting to around €500 million (US$541 million). A third round of funding is expected in May.
Unsurprisingly, Finland’s budget deficit is expected to widen this year by €14 billion to €16.6 billion, which is equivalent to 7.2% of GDP, according to the Ministry of Finance. The country’s deficit stood at 1.1% of GDP last year, up from 0.8% in 2018.
Finland’s debt-to-GDP ratio is projected to rise sharply this year to nearly 70%, from 59.4% of GDP last year.
Inflation slowed to 0.6% in March 2020, the lowest level in two years, mainly caused by lower prices of fuels for personal transport equipment and light fuel oil, according to Statistics Finland. Despite this, inflation is expected to accelerate to 1.4% this year and to 1.5% in 2020, based on the European Commission’s forecast published in February 2020.
- Prices of old dwellings in housing companies rose in Greater Helsinki and decreased elsewhere in Finland in the latter part of 2019 (Statistics Finland):http://www.stat.fi/til/ashi/2020/02/ashi_2020_02_2020-03-31_tie_001_en.html
- Housing (Statistics Finland): http://www.stat.fi/tup/suoluk/suoluk_asuminen_en.html#Household-dwelling%20units
- World Economic Outlook Database, October 2019 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/index.aspx
- New household loans by purpose and initial rate fixation (Bank of Finland):
- Finnish MFI euro-denominated loans to euro area households, by purpose (Bank of Finaland): https://www.suomenpankki.fi/en/Statistics/mfi-balance-sheet/tables/rati-taulukot-en/lainat_kotitalouksille_en/
- Buildings and free-time residences (Statistics Finland): http://www.stat.fi/til/rakke/index_en.html
- Rents of dwellings (Statistics Finland): http://www.stat.fi/til/asvu/index_en.html
- Apartment yields in Helsinki range from low to moderate (Global Property Guide): https://www.globalpropertyguide.com/Europe/Finland/Rental-Yields
- Finnish MFI euro-denominated loans to euro area households, by purpose (Bank of Finland): https://www.suomenpankki.fi/en/Statistics/mfi-balance-sheet/tables/rati-taulukot-en/lainat_kotitalouksille_en/
- Finland GDP Growth Rate (Trading Economics): https://tradingeconomics.com/finland/gdp-growth
- Finnish economy hit hard by coronavirus (Finnish Government): https://valtioneuvosto.fi/en/article/-/asset_publisher/10623/koronavirus-iskee-lujaa-suomen-talouteen
- Finland Unemployment Rate (Trading Economics): https://tradingeconomics.com/finland/unemployment-rate
- Inflation 0.6 per cent in March (Statistics Finland):https://www.stat.fi/til/khi/2020/03/khi_2020_03_2020-04-14_tie_001_en.html
- 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
- Ministry of Finance: Finnish economy to contract by 5.5% in 2020 (Helsinki Times): https://www.helsinkitimes.fi/finland/finland-news/domestic/17563-ministry-of-finance-finnish-economy-to-contract-by-5-5-in-2020.html