Deep Recession In Finland Crashing Housing Market

Finland’s economy has been seriously damaged by the global economic recession, which is not unusual as Finland’s economy has a long history of violent cyclical behavior. As a …

Finland’s economy has been seriously damaged by the global economic recession, which is not unusual as Finland’s economy has a long history of violent cyclical behavior. As a result, real estate transactions and prices are down throughout the country, with Helsinki being hit harder than outlying areas. The following article from Global Property Guide describes the state of Finland real estate.

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.

The global downturn has caused a severe contraction in the Finnish economy, and a 5.2% fall in the average price of ‘existing’ dwellings, during the year to end-Q1 2009.  Adjusted for inflation, existing dwelling prices fell by 6.8% y-o-y to end-Q1 2009, according to Statistics Finland.  The average price of existing houses is now €1,878 per sq. m.

Prices of new dwellings fell less – by only 1% y-o-y, or 2.6% after inflation.

Helsinki was more affected by the decline than the rest of Finland, again unsurprisingly due to its role in the export-oriented economy.  Existing dwelling prices fell 7.5% in the Helsinki Metropolitan Area, to €2,708 per sq. m. (-9% in real terms).  New dwellings fell 4.6% (-6.2% in real terms).

Real estate transactions were down in early 2009, after a 14% decline in deal numbers in 2008, to 70,248.  Helsinki registered a sharper fall in transactions (-17%) than the rest of Finland (-13%).

The economy is expected to contract by as much as 5.6% in 2009, the most severe recession since 1991.

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:

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  • 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 €24.3 billion 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.

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; andan 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.

Yes, it’s a 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 will surely see an economic recovery, but is late in the global economic cycle.

Finland’s economy is in deep recession

Finland grew strongly from 2004 to 2007, with 3.9% average growth – way above the euro area. But growth in 2008 dropped to 0.92%. High inflation, the credit crunch, and lower demand for Finland’s exports, which account for around 45% of GDP, squeezed the economy.

Export volumes contracted 25.5% y-o-y in Q1 2009. Because of this, economy is expected to shrink by as much as 5.7% in 2009. Unemployment, now 9.1%, is expected to be over 10% by the end of 2009.

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.

Deflation looms

By June 2009 annual inflation was only 0.1%, raising concerns of a deflationary cycle similar to Japan’s. In response, the government has increased spending and cut taxes, pushing the budget into deficit for the first time since 1997. This year’s deficit is expected to be 2.5% of GDP.

This article has been republished from Global Property Guide. You can also view this article at
Global Property Guide, an international real estate analysis site.


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