Finland’s housing market is now weakening, amidst rising interest rates and a slowing economy. The nationwide average price of old dwellings rose by a modest 2.5% to €2,794 (US$2,784) per square meter (sq. m.) during the year to Q3 2022, a slowdown from y-o-y rises of 4% in Q2 and 4.5% in Q1, according to figures released by Statistics Finland. In fact, when adjusted for inflation, prices actually declined almost 5% over the same period.
On a quarterly basis, nationwide house prices fell by 1.5% (-3% inflation-adjusted) in Q3 2022.
In Greater Helsinki, the average price of old dwellings increased by a meager 0.2% to €4,794 (US$4,777) per sq. m. during the year to Q3 2022 and actually plunged by 7.1% in real terms. It was the region’s worst performance since Q4 2015. In the rest of the country, prices rose by 4.3% (-3.3% inflation-adjusted) y-o-y to €1,990 (US$1,983) per sq. m.
By property type:
- The average price of terraced houses rose by 3.9% (-3.6% inflation-adjusted) y-o-y to €2,248 (US$2,240) per sq. m. in Q3 2022. Quarter-on-quarter, prices fell by 0.2% (-1.8% inflation-adjusted) during the latest quarter.
- Prices of blocks of flats were up slightly by 1.4% (-6% inflation-adjusted) to €3,088 (US$3,077) per sq. m. during the year to Q3 2022. On a quarterly basis, prices dropped 2.5% (-4.1% inflation-adjusted) in Q3.
Demand is showing signs of slowdown, amidst rapidly rising interest rates. In the first three quarters of 2022, total transactions of old dwellings fell a huge 22.6% to 48,855 units as compared to the same period last year, in stark contrast to y-o-y rises of 16.1% in 2021 and 12.7% in 2020, according to Statistics Finland. Sales transactions plunged by 21.5% in Greater Helsinki and by 23% in the rest of the country.
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.
Residential construction activity showed mixed results, with dwelling permits and starts falling by 17.7% and 6.6% y-o-y, respectively, during the first eight months of 2022. In contrast, dwelling completions rose by 4.7% over the same period.
Overall, Finland’s housing market is expected to continue to weaken in the medium term, as it faces considerable headwinds. In fact, the Mortgage Society of Finland expects house prices to start falling by the end of this year. Accordingly, Finnish house prices will increase by a minuscule 1.5% this year and will fall by 0.5% in 2023. On the other hand, financial services provider OP Financial Group projects house prices to decline by 1% to 3% next year.
Finland’s house price annual change
“The peak in the real estate market is behind us, demand has petered out and price development has become increasingly muted,” said OP Financial Group. “The market mood is being weighed down, particularly by rising interests, but also by eroding economic confidence and increases in costs.”
Despite a strong start, the economy is projected to slow during the remainder of the year. Bank of Finland expects the Finnish economy to grow by a modest 2.2% this year, before contracting by 0.3% in 2023. On the other hand, the European Commission projects minuscule growth of 1.8% in 2022 and 1.2% in 2023, a sharp slowdown from last year’s 3% expansion.
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 rates. Since 2001, more than 90% of new mortgages have been variable rates, 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 from 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, 1983-2021
|Periods||Finland||Helsinki||Rest of Finland|
|Q2 2008-Q1 2009||-6.4%||-8.6%||-4.0%|
|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 remained more or less stable in recent years, despite the COVID-19 pandemic. From 2019 to 2021, nationwide house prices rose by a modest 2.7%, in inflation-adjusted terms. Real house prices increased by 6.9% in Greater Helsinki but declined slightly by 1.4% in the rest of the country.
Residential construction activity mixed
Residential construction activity showed mixed results, amidst the combined impact of supply chain disruptions and rising construction materials costs. During 2021:
- Dwelling permits increased by 9.9% to 45,434 units, following an annual increase of 5.8% in 2020 and y-o-y declines of 11.6% in 2019 and 9.8% in 2018, according to Statistics Finland.
- Dwelling starts rose strongly by 18.5% to 46,819 units, a sharp improvement from a y-o-y increase of 7.2% in 2020 and annual declines of 16.1% in 2019 and 0.3% in 2018.
- Dwelling completions, on the other hand, fell by 4% to 37,489 units, following a y-o-y decline of 9.1% in 2020, an almost steady activity in 2019, and a strong growth of 20% in 2018.
The trend reversed this year, with dwelling permits, and starts falling by 17.7% and 6.6% y-o-y, respectively, during the first eight months of 2022. In contrast, dwelling completions rose by 4.7% over the same period.
Currently, there are currently over 3 million dwellings in Finland.
Property transactions falling again
Demand is showing signs of slowdown again, amidst rapidly rising interest rates. In the first three quarters of 2022, total transactions of old dwellings fell a huge 22.6% to 48,855 units as compared to the same period last year, in stark contrast to y-o-y rises of 16.1% in 2021 and 12.7% in 2020, according to Statistics Finland.
Over the same period:
- In Greater Helsinki, transactions for old dwellings were down 21.5% y-o-y to 14,562 units, after rising by 11.9% during 2021 and 12.4% in 2020.
- In the rest of the country, transactions for old dwellings dropped 23% y-o-y to 34,204 units, after an annual increase of 17.8% in 2021 and 13.8% in 2020.
By property type:
- For terraced houses, transactions plunged by 26.6% y-o-y to 14,907 units during the first three quarters of 2022, after increasing by 14.4% during 2021 and 15.8% in 2020.
- For blocks of flats, transactions fell by 20.6% y-o-y to 33,888 units, following annual growth of 16.9% in 2021 and 11.8% in 2020.
Mortgage interest rates rising rapidly
Finland’s new housing loan interest rates rose to 1.85% in August 2022, sharply up from 0.74% in the same period last year, according to the Bank of Finland.
For new housing loans, in August 2022:
- Up to 1-year initial rate fixation (IRF): 1.83%, up from 0.72% a year earlier
- Over 1-year IRF: 2.57%, up from 1.29% a year earlier
For outstanding housing loans, the average interest rate was 1.11% in August 2022, up from 0.79% a year earlier. Over the same period:
- Up to 1-year maturity: 1.03%, up from 0.62% a year ago
- Over 1 and up to 5 years maturity: 1.07%, up from 0.81% in the previous year
- Over 5 years maturity: 1.11%, up from 0.79% a year earlier
The abrupt increase in loan rates is mainly attributed to the European Central Bank’s move to raise its key rate to rein in inflationary pressures. In September 2022, the ECB raised its repo rate further by 75 basis points to 1.25%, following a 50 basis point rate hike in July 2022. It was the highest level since November 2011.
The mortgage market continues to grow, albeit at a 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.
However, the mortgage market has been more or less steady in recent years, amidst the economic repercussions brought by the Covid-19 pandemic. As a percentage of GDP, the size of the mortgage market stood at 42.6% in 2021, 41.5% in 2019, and 42.5% in 2017.
Housing loan growth averaged 2.4% annually from 2013 to 2021, a sharp slowdown from annual expansions averaging 6.8% in 2008-12 and 14.4% in 2001-7.
In August 2022, the total amount of housing loans outstanding stood at €107.92 billion (US$107.55 billion), up by a modest 2.3% from a year earlier, according to the Bank of Finland.
Low to moderate rental yields, rising rents
Rental apartments have low to moderate returns, with gross rental yields in Helsinki ranging from 2.86% to 4.11%, according to Global Property Guide research.
Smaller apartments in Helsinki ranging from 60 sq. m. to 90 sq. m. have rental yields of 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 by growth of only 17%. In Helsinki, house prices rose 55% while private rents rose by only 12%, leading to relatively low rental yields.
Rents continue to rise. The average monthly rent in Finland was €14.69 (US$14.64) per sq. m. in Q3 2022, up by 3.6% from the previous year, according to Statistics Finland. Private rents rose by 4.8% to €15.99 (US$15.94) per sq. m., far higher than the 1.5% increase to €12.12 (US$12.08) per sq. m. on government-subsidized rents.
Greater Helsinki rents were up by 1.7% y-o-y to €18.13 (US$18.07) per sq. m. in Q3 2022. Private rents were around €20.64 (US$20.57) per sq. m., comparably higher than government-subsidized rents, averaging at €13.55 (US$13.5) per sq. m.
In Q3 2022, average rents of government-subsidized dwellings are about 34% lower than private rents in Helsinki, and 24% cheaper in Finland as a 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 slow this year
The Finnish economy grew by 3% in Q2 2022 from a year earlier, following y-o-y expansions of 3.9% in Q1 2022 and 2.9% in Q4 2021, primarily driven by strong private consumption and government spending, according to Statistics Finland. On a quarterly basis, the economy expanded by 0.9% in Q2 2022, after growing by 0.5% in the previous quarter.
Despite the strong start, the economy is projected to slow during the remainder of the year due to the adverse impact of the energy crisis in the region, exacerbated by surging inflation. Bank of Finland expects the Finnish economy to grow by a modest 2.2% this year, before contracting by 0.3% in 2023. On the other hand, the European Commission projects minuscule growth for Finland of 1.8% in 2022 and 1.2% in 2023, a sharp slowdown from last year’s 3% expansion.
“Although the robust start to the year provides a good foundation for growth in 2022, the energy crisis triggered by Russia’s invasion of Ukraine will stifle growth towards the end of the year. Exceptionally high inflation is diminishing households’ purchasing power and consumer confidence has sunk to a very low ebb, curbing private consumption,” said the Bank of Finland in its September 2022 Interim Forecast.
“The Finnish economy is forecast to grow by 2.2% in 2022 and to contract by 0.3% in 2023,” the bank added.
To address the energy crisis, the government has recently announced a €10 billion loan and guarantee scheme for the energy sector.
The economy contracted by 2.2% in 2020, 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 eurozone, 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 labor costs.
Yet the labor market continues to improve in recent years. In September 2022, the nationwide unemployment rate was 6.7%, down from 7% a year earlier and 7.5% two years ago, according to Statistics Finland.
There were 189,000 unemployed persons in September 2022, down slightly by 2,000 from a year earlier.
Consumer prices are rising sharply. In September 2022, inflation accelerated to 8.1%, up from the previous month’s 7.6% and the highest level since March 1984, mainly due to higher electricity costs and increases in the average interest rate on housing loans. Overall inflation averaged 0.7% from 2014 to 2020, before rising to 3.2% in 2021.
Finland’s budget deficit fell back to a manageable level of about 2.6% of GDP in 2021, after it surged to 5.5% of GDP in 2020 due to the government’s introduction of massive stimulus packages to boost economic activity amidst the pandemic. The shortfall is expected to fall further to 2.1% of GDP this year, based on IMF forecasts.
Finland’s debt-to-GDP ratio stood at around 66.2% last year, slightly down from 69% in 2020 but still up from 59.6% in 2019.
- Prices of dwellings in housing companies (Statistics Finland): https://stat.fi/en/statistics/ashi
- Housing and construction (Statistics Finland): https://www.stat.fi/tup/suoluk/suoluk_asuminen_en.html#Buildings%20and%20free-time%20residences
- Hypo: House prices in Finland to decline in 2023 for the first time since 2015 (Helsinki Times): https://www.helsinkitimes.fi/finland/finland-news/domestic/22062-hypo-house-prices-in-finland-to-decline-in-2023-for-the-first-time-since-2015.html
- OP expects Finnish house prices to drop by 1–3% in 2023 (Helsinki Times): https://www.helsinkitimes.fi/finland/finland-news/domestic/22205-op-expects-finnish-house-prices-to-drop-by-1-3-in-2023.html
- MFI balance sheet (loans and deposits) and interest rates (Bank of Finland): https://www.suomenpankki.fi/en/Statistics/mfi-balance-sheet/
- Rents of dwellings (Statistics Finland): https://www.stat.fi/til/asvu/index_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://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/finland/economic-forecast-finland_en
- Quarterly Review Q3/2022 (State Treasury, Republic of Finland): https://www.treasuryfinland.fi/publications/quarterly-review-q3-2022/
- Interim forecast: Energy crisis will shrivel growth in Finnish economy (Bank of Finland Bulletin): https://www.bofbulletin.fi/en/2022/articles/energy-crisis-will-shrivel-growth-in-finnish-economy/
- Labor force survey (Statistics Finland): https://stat.fi/en/statistics/tyti
- Inflation 8.1 percent in September 2022 (Statistics Finland): https://stat.fi/en/publication/cktvgalyo28e20b617q1kprhq