The Impact of the Financial Crisis on the Finnish housing market and Households By Elias Oikarinen Financial Crisis, Property Markets & Homeownership, , Reykjavik

2 Structure of the presentation Brief overview of the impact of the crisis on the Finnish overall economy Why haven’t housing prices collapsed in Finland? –What is different between the current crisis and the recession of the early and mid 1990s? Household indebtedness and the effect of the crisis on households What about the near future?

3 Finnish real GDP and unemployment rate 1975Q1-2009Q2 Data source: Statistics Finland

4 Finnish real exports and export share of GDP 1975Q1-2009Q2 Data source: Statistics Finland

5 The twofold influence of EMU +Strong currency – low inflation +Low interest rates -No devaluation  exports suffer (2008Q3-2009Q3 down 38%)  unemployment

6 Real housing price index (1987Q1=100) Helsinki metro area & the rest of Finland 1987Q1-2009Q3 Hedonic real price indices of privately financed flats, Data source: Statistics Finland

7 Why haven’t housing prices collapsed? Relatively low level of housing prices before the crisis –Housing prices vs. household income –Housing prices vs. rental price level –User cost of housing vs. rental price level (e.g. OECD and IMF computations) Drop in the mortgage rates Relatively low indebtedness and absence of subprime type loans Household income has still increased Banks are in a relatively good shape (credit availability) Government stimulus Housing construction halted  low level of new housing supply

8 Real housing price development in Finland vs. in some other developed countries

9 Real housing price index, real wage and salary earnings index and average nominal after-tax mortgage rate 1970Q1-2009Q3 Data source: Statistics Finland & own computations

10 Mortgage rates on new housing loans and on the whole housing loan stock 1989Q3-2009Q3 Average mortgage rate reacts rapidly to changes in (mainly) the 12 month Euribor rate –Mostly adjustable rate mortgages with interest rates tied to the 12 month euribor (or even shorter term rate) –This feature is beneficial now to undermine the harmful effects of the crisis, but it is a risk factor in the future

11 A negligible share of housing loans is tied to fixed (for more than 12 months) interest rates:

12 Real asset price and rental price development in the housing market (Helsinki area, privately financed market) Data source: Statistics Finland

13 Real housing price index, sales volume and housing starts 1987Q1-2008Q4 (flats) Data source: Statistics Finland (all started construction of flats, including subsidized construction; prices and sales represent privately financed flats)

14 Subsidized production has been counter-cyclical during the crisis – good for the economy

15 Homeownership rate (66% in has still increased from 2006 and 2007) Kuvio kehityksestä

16 Why did housing price level collapse in the late 1980s – early 1990s? Liberalization of the financial market induced a huge growth of credit  there was a substantial housing price overshot Devaluation of the Finnish Mark  interest rates notably rose & indebtedness substantially increased (a significant share of loans were in foreign currencies)  defaults, forced housing sales Credit availability and backward-looking expectations led to a boom in housing construction; new construction topped when prices were already dropping  oversupply Similar boom-bust cycle recently in the Baltic countries (and in Iceland?)

17 The financial crisis and Finnish households

18 Indebtedness and interest payments of Finnish households (% of the household disposable income) 1 Housing loans; 2 Consumption loans; 3 Other loans; 4 All loans (prediction) 5 Interest payments (right scale); 6 Prediction for 2009 (right scale)

19 New housing loan drawdowns have declined but not collapsed:

20 The impact of the crisis and housing market development on households Disposable income of the employed has still increased (tax cuts & increases in wages) Availability of credit for households has (almost) returned to the 2007 level (after a notable tightening in autumn 2008) Interest rates are extremely low (despite the growth of the margins set by banks) No ”negative equity” problem Rental prices have increased Special incentives for the first-time home-buyers  Most households’ ability to buy housing is good  Sales volume has increased lately

21 The impact of the crisis and housing market development on households, cont’d Unemployment rate has increased and further grows  income uncertainty  defaults & forced sales?  downwards pressures on housing prices Not many defaults or forced sales yet, though –Low interest rate –Flexibility of the terms of loan payments (longer maturities, installment free periods) –Unemployment insurances (last usually only around 12 months)

22 What about the close future? GDP will not drop any more, but the growth will be slow (Bank of Finland) 2009: -7.2% 2010: 0.0% 2011: 1.6% Unemployment rate keeps increasing 2009: 8.7% 2010: 10.6% 2011: 10.8% Potential threat is caused by the increasing unemployment together with the adjustable mortgage rates and the fact that the interest rates will probably somewhat increase in the future

23 Economic sentiment indicator (ESI) in EU and in Finland 1985/1-2009/10

24 Finnish consumer confidence regarding the overall economy and households’ own economy 1995/ /10

25 Conclusions Finland has suffered severely from the financial crisis Nevertheless, housing prices have not collapsed Most households and the banking sector are doing well –Level of defaults regarding housing loans is still relatively low –This is likely to be, to some extent, due to the lessons learned from the boom-bust cycle of the late 1980s and the early 1990s Indebtedness has increased, but not dramatically Banks have taken relatively small risks (e.g. no subprime type lending) However, unemployment is still rising and the variable mortgage rates involve apparent risks