Finnish housing market slowing
July 31, 2012
During the year to May 2012, the average price of old dwellings in blocks of flats and terraced houses in Finland rose by 1.7% to €2,127 per square meter (sq. m.), according to Statistics Finland. However, when adjusted for inflation, property prices actually dropped by 1.2% over the same period.
- In Greater Helsinki, the average old dwellings price increased by 2.1% (-0.8% inflation-adjusted) to €3,337 per sq. m.
- In the rest of the country, the average old dwellings price rose by 1.3% (-1.6% inflation-adjusted) to €1,653 per sq. m.
Terrace houses prices rose by just 0.5% (-2.4% inflation-adjusted) to €1,991 per sq. m. over the year to May 2012, with a greater ‘real’ fall in Greater Helsinki (-2.9% inflation-adjusted) to €3,106 per sq. m., than in the rest of the country (-1.8% inflation-adjusted) to €1,695 per sq. m.).
Prices of blocks of flats rose by 2.3% y-o-y (-0.6 inflation-adjusted) to €2,215 per sq. m. in May 2012, with a stronger performance in Greater Helsinki (a rise of 3% (+0% when adjusted for inflation)) to €3,432 per sq. m. In the rest of the country, the average blocks of flats price rose by 1.6% (-1.4 inflation-adjusted) to €1,620 per sq. m.
Finnish house prices are expected to remain flat in 2012, according to the Danske Research Team.
Construction activity is falling. The area covered by residential building permits plunged by 30.2% in March 2012 from a year earlier. Terraced houses recorded the biggest drop of 57.7%, followed by residential blocks of flats (-42.4%) and detached houses (-13.2%).
Interest rates are very low. The average interest rate on new housing loans was 2.03% in May 2012, down from 2.10% from the previous month, and the average rate on the total bundle of loans was 2.18%. Despite low interest rates, the value of new housing loans was almost unchanged on last year, at €2 billion in May 2012, according to Bank of Finland.
Some forecast that the Finnish economy will contract by 0.9% in 2012, while others expect growth of 0.5%. Nevertheless, this is far from the healthy economic growth of 2010 (3.7% GDP growth) and 2011 (2.9% GDP growth).
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:
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%|
|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.