Finnish house prices hit by construction surge

November 12, 2010


In Q3 2010, a large volume of residential construction has halted the previous house price surge in Finland. The new construction reflects newfound confidence in the economy.

The average price of old apartments fell 0.75% during Q3 to €2,117 per sq. m., the first quarterly price fall since Q4 2008, according to Statistics Finland (StatFin).

  • The average price was up 8.2% on the year - lower than the double digit house price increases during the past two quarters. 
  • In Greater Helsinki, the Q3 average price of old dwellings was up 9.6%, compared to the same quarter last year, at €3,224 per sq. m..  
  • For the rest of Finland, the average price up by 6.9% y-o-y, at €1,817 per sq. m.. 

In contrast, prices of dwellings in new blocks of flats and terraced houses increased during Q3 2010.

  • In Greater Helsinki, the average new dwelling price rose 6.3% to €4,185 per sq. m. on the quarter
  • The average new dwelling price rose 0.4% in the quarter to €2,666 per sq. m. in the rest of Finland.

The volume of new residential buildings surged 65.6% during the year to August 2010. Construction of terraced houses was particularly strong, up 138% on the year. The growth partly reflects 2009’s low construction volumes, due to the recession.

Finland has traditionally had a very cyclical economy, highly exposed to world markets, and sensitive to global shocks.  A major driver of Finland’s GDP growth is Nokia, the country’s largest company, and the single most significant cause of the country’s success.  

No surprise then that the global downturn caused a severe economic contraction.   

Finland’s violent house price cycles

Finland’s house price boom lasted from 2001 to Q2 2008.  The upsurge in house prices was mainly due to:

  • Strong economic and wage growth.
  • Changes in the mortgage market, combined with low interest rates, which made housing more affordable for all income brackets. Outstanding housing loans to Finnish households grew 153% from €24.3b illion in 2000, to €67.6 billion in 2008; or from 18.4% of GDP to 36.3% of GDP.
  • The tax system. Owner-occupation is still privileged by the tax system, for 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.

From 1980 to the present, the country experienced four distinct house-price cycles:


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%
Source: Statistics Finland

The relative volatility of house prices in Finland is mainly due to:

  • the export-oriented economy’s sensitivity to global shocks;
  • the housing market’s high interest rate sensitivity; and
  • an insufficiently responsive supply side.

House prices are falling in Finland primarily because the two main causes of the house price boom (a strong economy, and low interest rates) no longer apply. But an additional factor is that the market has become more interest-rate sensitive:

  • In 1994, about 70% of new mortgages were variable rate.
  • Since 2001, more than 90% of new mortgages have been at variable rates, taking advantage of the historic low interest rates from 2003 to 2006.

The credit crunch

It was a severe shock to the housing market when interest rates on new loans rose in October 2008 to 5.53%, following a spike in inflation due to rising food import prices.  The European Central Bank (ECB) had raised the repo rate by rapid steps to 4.25% in July 2008, from a record low of 2.0% in November 2005. 

Combined with the global recession, these rate hikes soon set off a severe economic downturn across Europe, and in May 2009 the ECB was forced to bring the base rate down again to 1%. Finland’s average new housing loan mortgage rates fell to 2.55%.  

Yet during the first half of 2009, new mortgages ran at only €1.805 billion per month, down from €2.574 billion/month during the same period in 2008.

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).

Around 58% of dwellings are owner-occupied, 32% are for rental while other forms of tenure account for the remaining 10%. Around 40% of new dwellings in Finland are bought by housing associations, and 35% by private individuals. 

Low yields and subsidized-rents

Finland’s private rental market is still relatively subdued, with about half of rental dwellings (about 800,000 units) receiving some form of government subsidy or support. Even with the complete deregulation of the private rental market in 1995, private rents are still distorted, due to the large social housing sector. Government subsidized rents are 25% lower than private rents in Helsinki, and 15% cheaper for Finland as a whole.

After the initial rapid rent increases after rent liberalization, recent rental growth has been slow. From 2001 to 2007, house prices in Finland rose by around 50%, while private rents trailed with growth of only 17%. In Helsinki, house prices rose 55% while private rents rose by only 12% over the same period. This has led to relatively low rental yields in Finland, ranging from 3.7% to 5.8% per annum in August 2008, according to the Global Property Guide.

In 2008, private rents rose 4.06% y-o-y, while government-subsidized rents rose by 5.3%.

In 2009 low inflation and weak demand, and a larger supply of units as home sellers lease out unsold second houses, are expected to moderate rent rises.


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