Despite some public concern over households’ indebtedness and the housing market’s potential structural vulnerabilities, the Finnish home loan market is healthy and calm.
“The Finnish housing market does not show signs of overheating. The calm is evident in housing prices and the growth of the home loan portfolio. Housing prices are on the average long-term level in relation to rents and income level”, says Veli-Matti Mattila, Chief Economist of the Federation of Finnish Financial Services (FFI).
The Finnish housing finance system is stable. “Finns repay their loans responsibly, and banks keep careful collateral principles. There are no ‘eternal’ mortgages like in some countries ‒ on average, home loans are paid back in less than 20 years. During the credit decision, the customer’s repayment ability is assessed also at interest rate levels that are significantly higher than the current rate. The fact that Finnish banks suffer very low credit losses from home loans is an indicator of the health of the market.”
According to the EU-wide stress test results that the European Banking Authority (EBA) published in July, the largest banks operating in Finland are capable of maintaining strong capital adequacy even in a scenario with clearly adverse economic conditions. The same goes for Nordic banks in general. This should dispel the fears some parties have expressed regarding the potential of risks spreading from the Nordic connections of the Finnish banking sector.
Preventing over-indebtedness
According to Mattila, Finnish authorities already have a comprehensive toolkit they can use to prevent the excessive indebtedness of households. “A ceiling on mortgage loans was implemented six months ago. The Finnish Financial Supervisory Authority has also decided to set a floor to the average risk weight of certain banks’ home loan portfolios by next July. Instead of planning new limitations, we should gather experiences from the tools currently available to us.”
The proposed income-linked loan and loan service ceilings would be difficult to apply in practice, because the circumstances of households change from one year to the next. The ceilings could easily lead to unreasonable situations.
“Purchasing a home is one of the most important decisions of a household. It requires years of preparation and saving. It is therefore important that housing finance regulation is consistent and long-term in scope”, Mattila emphasises.
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