Big surprise – Excessive Finnish Real Estate Loans!

The media is suddenly full of comments from banks and regulators that housing company loans may be excessive – it appears that nobody has ben following simple and obvious events this last 20 years as a few big construction companies have run comfortable cartel pricing on new apartments and banks have been lending them more and more money.

The new apartments are the crux of the problem, not so much the older apartments that remain cheaper to buy and maintain. However, important and costly renovations of older apartments, every 50 to 60 years, are now being exploited by banks and construction companies. 

This important renovations needs to be carefully planned and implemented because they are costly. Without power supervision many apartment owners find themselves faced with liabilities that are beyond heir reach. In such cases, they are forced to sell and move to less expensive and probably smaller homes. There is nothing wrong with this because older apartment blocks must be maintained to appropriate standards, but commercial and unfair exploitation by banks and construction companies must be reigned in. Moral hazard is also in the air – it appears that banks are lobbying politicians hard for protection.

Nordea’s CEO, Von Koskull, has said recently, “Housing company loans have the risk that when the loans fall due and the housing market turns, they can create pressure, with certain macroeconomic risks  (= more price falls…), which is why we have also wanted to raise this question.” 

Nordea and the Cooperative banks are the largest lenders and nobody is forcing them to lend money to housing companies…

Apartment blocks in Finland are organised as housing companies. Ownership of each apartment is organised through specifically numbered shares and give voting rights at the shareholders’ meetings. The number of shares is fixed in most cases by the floor area of the apartment, so the bigger the apartment the more votes can be cast.

A board, appointed from the residents, are responsible for managing the housing company’s affairs, maintenance and renovations. The costs from these affairs are covered by monthly payments which are divided up by the floor area of their apartment. In larger housing companies a professional real estate manager acts like a CEO of the housing company, and handles the daily and long term operations closely with the board. They are generally responsible for the management of the bank accounts, administering monthly board and annual shareholders’ meetings, and all matters relating to maintenance and renovations. They have a lot of power and influence over how well a housing company is managed.

Renovations are generally financed by bank loans and owners can either repay these loans with monthly instalments as “financial expenses” or they can take a loan by the owners and repay all or part of their share of the housing company’s bank loan.

Apartment blocks need to be renovated every 50 to 70 years, because they will lose their value if not cared for professionally. The roof, the outside walls, windows, water and sewage pipes, electric wiring, TV, and broadband circuits all need to be replaced over time. The costs are high, between €300 and €1500 a square meter, and need to be planned and managed professionally. They must be financed by long term loans by the housing companies since, most people do not have that kind of cash sitting on their bank account.

Owners can repay these housing company loans as monthly “financial expense” instalments through the housing company’s loan, or they can repay the loan with their own savings or by taking a bank loan themselves.

What is unfair is that an owner of an apartment who has rented it out can set off the monthly “financial expense” instalments against the rent he receives for tax purposes. So if he receives €200 in monthly rent, he can deduct the monthly maintenance fee of say €300 and the whole of the monthly “financial expense” instalments of say €1500 for tax purposes. This €1500 includes both interest and the loan repayment amounts. This inclusion of the loan repayment in this case is a significant tax advantage for real estate investors.

Up until 2000, most of the new apartment blocks had low levels of debt between 10% to 20% when sold to the first buyers. However, during the last 2 decades many new apartment blocks have been built and financed by big construction companies that borrow a much larger amount of debt and then pass these loans on to willing investment buyers who then rent out the apartments and take advantage of the above tax benefit. When interest rates are low or zero this gives investors a great tax break not available to ordinary folk with their own private housing loans.

Now the regulator and the politicians are getting worried that higher interest rates may cause banks and investors to lose money if the rental income cannot cover the loan costs! If they must sell, everybody knows there is a major risk of price falls and losses for investors and banks…

This has been known for years and yet nothing has happened. The 2 largest banks have enjoyed decades of huge profits from construction companies and happy real estate investors. Now when the tide is turning everyone starts jumping up and down and demanding regulation – regulation that was easily not wanted when times were good!

This is exactly a repeat of the US real estate boom and bust – low rates and excessive lending by banks and investors leads to a sharp rises in house prices, as has happened, followed by a sharp fall… and then taxpayers are asked to cover these costs by bank rescues…

The 2 largest banks are well prepared for this – the Cooperative banks are backed by the Centre Party and Nordea have close connections to the Conservative Party. Of course the lobbying is done efficiently well of sight of the media.

Site Footer