A high standard of living and a transparent legal framework have played a key role in shaping the Finnish housing market. Over the past few years, the Finnish real estate market has demonstrated a gradual and relatively predictable development. However, the measures introduced to control inflation led to an increase in the cost of lending, which, in turn, began to affect the decline in demand. How such measures affected the volume of construction, the number of transactions and the price level — in the latest REALTING analytics.
The decline in construction. What influenced it?
According to Statistics Finland, from 2015 to November 2023, more than 86 thousand permits were issued in Finland for the construction of detached, semi-detached and multi-family residential buildings* (including the construction of extensions, repairs and alterations comparable to the construction of a new building, building expansion or an increase in area).
* – excluding permits for the construction of residential buildings in which residents have a common kitchen, living room or sanitary facilities, and residential buildings for people with disabilities.
The number of building permits reflects the activity of developers, who, in turn, promptly monitor and respond to the changing needs of buyers. Thus, the indicator allows us to judge the trends in the real estate market in the country.
So, in the period from 2015 to 2017, there was a fairly high level of activity in the construction of new housing: The number of permits increased annually — by 7% in 2016 and by 3% in 2017. One of the reasons for the growth in these years was the agreement on land use, housing and transport, signed by the government back in 2012. The cooperation is aimed at improving the functionality and competitiveness of urban areas, and therefore the balanced development of urban infrastructure, land use, housing and logistics.
The program provides such support as state-subsidized housing construction, support for repair work, and the development of wooden housing construction.
It is also worth noting that local governments can levy a real estate tax on an empty land plot if it is located in an urban planning area and is not used for residential purposes or is not under construction. The tax rate in this case will vary from 2% to 6%.
Such agreements were also signed for 2016-2019 and 2020-2031, including new regions.
In addition to government regulation, there has been a trend towards innovations in housing design and layout, as well as modern and energy-efficient solutions in construction due to rising energy prices.
Since 2018, the decline in the construction sector has begun. As a result, the number of permits decreased by 14% in 2 years.
The pandemic and restrictions on movement have led to increased demand for suburban real estate in 2020 and 2021. As a result, the number of permits for the construction of private houses has increased.
The most active period was 2021 — 11,508 permits. Although already in 2022, the activity of developers has sharply decreased — by 25% at once. And 2023 showed the worst indicator for the entire period under review. — 5,361 housing permits, which is 1.6 times less than in the previous year and more than 2 times less than in 2021. The drop in demand led not only to a decrease in construction volumes, but also to the bankruptcy of Finland’s largest developers.
It is worth noting another feature concerning the construction of new housing — this is a decrease in the area of apartments and houses. At the moment, the average size of the living space is 40-60 sq. m. m, while about a decade ago the average area was 80-90 sq. m.
Rising interest rates and a decrease in the number of transactions
The period from 2016 to 2017 is characterized by an increase in buyer activity: the number of transactions with new buildings increased by 34% and 42%, respectively, and compared to 2015, the indicator increased by 1.9 times. Before the 2020 pandemic, the market stabilized — the number of transactions remained at a high level — at least 11 thousand. per year. Restrictions due to COVID-19 led to a 12% decrease in the number of transactions. Nevertheless, 2021 has approached the level of the “pre—crisis” period – 10,724 purchase and sale transactions.
In 2022, there was a sharp decline in activity — housing in new buildings began to be bought almost 2 times less. And in 2023, the worst indicator was recorded in terms of the number of purchase and sale transactions – a total of 2,039 transactions on the “primary”, which is 2.7 times lower than in 2022 and more than 5 times lower compared to 2021. The main reason for this is an increase in inflation and, as a result, a change in interest rates.
Rising interest rates since mid-2022 have significantly increased the cost of lending to consumers. So, in December 2023, the mortgage rate was at 4.1%, for comparison, since 2017, the interest burden has not exceeded 1%.
Touching on the topic of mortgages, it is worth saying that the terms of lending for the purchase of housing in Finland are standard: the initial payment is from 5% to 20% of the value of the property, the loan term is 25-30 years. The bank also evaluates the value of the property to make sure that the requested loan amount corresponds to the market value of the property.
“Two-pieces” are bought most often
Considering the structure of transactions in the primary real estate market by type of object, we can say thatSince 2015, buyers have more often preferred housing in multi-family residential buildings. The share of apartments in transactions was above 80% throughout the period under review, with the exception of 2015 and 2022 — then 24% and 21% of all transactions in the primary market were made with private houses, respectively.
By the way, two—bedroom apartments were most often bought in new buildings in 2023 – they accounted for 42% of all apartment transactions on the primary market. This is followed by three—room apartments — 33%, followed by one—room apartments – 25% of all transactions on the “primary”.
There are also certain peculiarities when owning a house and an apartment.
Firstly, owning a private house in Finland includes not only the ownership of the building itself, but also the land on which it is located. Owners are required to take care of their property, comply with building codes and land use rules.
Secondly, the ownership of an apartment in an apartment building in Finland is usually carried out through housing joint-stock companies. When buying an apartment, the future owner actually acquires shares that give the right to use a certain apartment. Owners are required to pay monthly fees for the maintenance and repair of communal premises and infrastructure. They also have the right to vote at shareholder meetings, where issues of management and operation of the house are resolved.
In 2020, real estate in the Helsinki region was in maximum demand — 42% of all transactions on the primary market. Subsequently, the share of transactions in this territory has steadily declined, reaching a minimum of 25% in 2023. The decrease in the share of transactions in the capital region is due to several factors.
Firstly, looking ahead, we can say that Helsinki is the most expensive city in Finland in terms of housing. High prices scare away buyers, which leads to a decrease in the share of transactions.
Secondly, it is the saturation of the market: the housing market in Helsinki is likely to face saturation after a period of intensive construction and development within the framework of the already mentioned state program. And the development of other regions stimulates activity outside the capital.
Changing preferences also play an important role: there is a tendency to live in less crowded and more affordable areas outside of large cities, especially in the context of the increased popularity of remote work.
In 8 years, prices for real estate in the capital have increased by 32%
The capital of Finland and its suburbs throughout the period under review retains the status of the most expensive location in the country for the purchase of housing. The price of primary real estate in Helsinki tended to increase until 2022.
By the end of 2022, there was a slight decrease of 1%, and the price was set at €6094/sq.m. Fluctuations within 3% occurred until the 3rd quarter of 2023, followed by an increase of 8%. The result of the 4th quarter of 2023 is €6317/sq.m. Over 8 years, prices for real estate in the capital have increased by 32%.
Housing in Helsinki and the suburbs is 1.5 times more expensive than in the rest of the country on average.
The trends in the rest of the country until 2022 are in many ways similar to those in the capital. Since 2022, the regions have shown great instability, especially in the 1st half of 2023. So, as a result of the 1st quarter of 2023, the price decreased by 8%, and in the second quarter it added 13%. In the 4th quarter of 2023, the price of primary real estate in Finland, excluding Helsinki, was at the level of €4,101/sq.m. Since 2015, the increase was 29%.
It is important to understand that the increase in prices for primary real estate reflects not only the level of demand, but also the overall increase in the cost of construction, including materials and labor.
The Finnish primary market has shown a high sensitivity to the availability of financing — measures to reduce inflation, which led to an increase in the cost of loans, exerted strong pressure on both buyers and developers. High interest rates have already affected the number of transactions, and a decrease in housing construction activity may have a mixed effect on the market in the long term due to deteriorating housing affordability. And this will lead to an increase in the cost of both buying and renting housing.
Author
Anastasia Fomina Analyst
I provide readers with high-quality analytical materials on global trends in the real estate market.
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