Housing bubble in parts of Finland? Yle Housing -edition

I thought recent statistics showed that at least in terms of total housing prices outside the Greater Helsinki area showed real signs of decline. It seems like the Finnish housing bubble is slowly deflating.

But now Finnish news service YLE has an interactive feature, to check the development of square-meter-prices by postal code area. Data is from Statistics Finland. There are some really drastic numbers. To show an example, this is the Rantakylä area of Joensuu in Eastern Finland (of which city I have earlier said, that there is something strange going on).

Source: Yle Asuntokone

Source: Yle Asuntokone

It says that the square-meter-price (blue line, for appartments) in this area of Joensuu was 536€ in 1987 and in 2013 it was 1760€.  Now, as you can see on this map, Rantakylä is broadly speaking on the edge of Joensuu – not quite the center although in Joensuu everything is relatively close.

As has been said e.g. here, Finnish housing prices are severely overvalued in terms of price-to-rent ratio, but for a long time the increase in housing prices more or less happened in tandem with increases in the average wage (yellow line). But since about 2005, which is very clear for Joensuu but also for certain areas in cities like Rovaniemi and Kuopio, the prices of these appartments originally bought in 1987 has increased much more than the average wage. A similar development can be seen for newer appartments (say from 2005) but then the price-increase is ‘only’ 72%.

On the other hand, there are many places in Finland where price developments have stagnated or declined, such as Toijala, which can be regarded as a commuting village to Tampere.

Source: Yle Asuntokone

Source: Yle Asuntokone

I think it is very difficult still to explain the surge in Joensuu prices. In a previous post (in Finnish) I argued that it can’t be completely explained by decisions to centralize the area’s health care to Joensuu, which goes to explain some part of the migration of health-care sector workers to Joensuu. But there remains a lot to explain. As I found earlier, also the real estate brokerage and construction sectors in Joensuu have shown growth.

It is probably true, that at this moment, with interest rates what they are, construction firms can build cheaply in the presumption that they will make a handsome profit anyway, because prices are rising. Consider this area of Joensuu, which is new (from around 1992, that is from after the Finnish recession of the 1990s):

Source: Yle Asuntokone

Source: Yle Asuntokone

Maybe this area is still not expensive in absolute terms, but given the average wage development, it looks like it is. Now, the question is: how would you finance an appartment, if you have to live in Joensuu for whatever reason. The easy answer is: a fat mortgage. Because with extremely low interest rates, it is possible to pay the mortgage down even if the price of the mortgage seems way too high regarding income.

As Michael Hudson has said,

They thought that homes were worth what the rental value was or what people could afford to pay when actually what a home is worth is whatever a bank is going to lend against it. So if somebody goes out to buy a home they’re bidding against other people for the same house and the winner is the person who can get the biggest bank loan and that’s the person who says I’m going to pledge all the rental value to the bank so the bank gets all the rent as if it were the landlord.

So here we see the danger of the ECB’s minimal interest rate policy: it creates asset/real estate bubbles. And banks are happy to play along, as long as they can borrow extremely cheaply from the ECB through the various liquidity-enhancing programmes.

The dangerous issue for Finland nonetheless is that a) these bubbles seem to be very local and b) work is very concentrated around cities and other places that have big employers such as the paper industry and the electronics industry. When these employers disappear, as happened in Oulu, Salo, the Kymenlaakso region, there is a big problem. Maybe people can still repay the mortgage as long as they have unemployment benefits, but the difficult part is selling the house, because when there’s no work, nobody will buy. And the other way around: as long as the house is not sold, people cannot move to places where there is work for them.

Although there are still many people who see this as some temporary glitch, I think this is a big problem for Finland and the Finnish economy. Eventually it will become a problem of the banks also.

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