The Finnish government has at last noticed that construction companies and banks are fooling unwitting home buyers into taking on too much debt. The construction companies and the banks know full well that their financial risks are relatively small compared to the disastrous impact of too much debt on individual families who just do not understand that they can loose their homes and remain in debt for years if they default on the loan.
Finland has had a housing construction boom controlled by a small group of construction companies that are accustomed to cartel-like actions. During the last couple of years new apartment buildings have sprung up like mushrooms…
… and just look at the price increases of new homes in Helsinki above – 15%!
Building homes here in Helsinki and the other big cities has nothing to do with what people want and everything to do with what the construction companies want and the politicians that back them.
Homes here mean apartment blocks squeezed together in the smallest possible space built according to the lowest possible standards and offered for sale at the highest possible price.
They are sold at a price per square meter. Finns buy their apartments like any shopper buying a pound of beef with exact pricing based not on weight but on the area of the apartment. Every square meter has a price and that depends on the position in the city, and seldom on the standard of the building.
Quality is not always very high – all the storage cupboards are made of white MDF, the floors are oak or laminate parquet, and the kitchens and bathrooms are tiled with white ceramic tiles. Balconies are glassed in and the roofs may or may not leak during the first snow, the lifts will malfunction and in some areas there may be no local shops, schools or stations until the first ten years have passed…
Most of the structural walls, ceilings and floor are made up from prefabricated concrete elements that are lifted in place by cranes when it rains. The windows and doors come before the plaster boards are screwed, surfaced and painted. The occupants are kept warm with district heating, triple glazing with good insulation. Some folk want their shoe-box sauna next to the shower, washing machine and dryer. In the cellar most new apartment blocks have a garage that costs €20 000.
Almost all apartment blocks are organised as “Housing Companies” by the construction company, that borrows money from banks for 15 years to pay for the construction and sales period. Traditionally, construction companies have borrowed around 30% of the construction costs of building in the name of the housing company. The rest has been financed with their own debt and with revenues from early sales. However, in recent years several construction company have arranged financing of some 70% of the cost of construction in the name of the housing company, thus reducing their need to finance the building during the construction period.
That housing company loan then passes automatically to the new owners of the housing company who buy numbered shares of the housing company giving them the right to specific apartment and a specific share of the housing companies debt, both of which are fixed in the Articles of Association based normally on the apartments floor space area.
The owners can deal with their share of the housing company loan in three ways depending on their circumstances:
- They can repay it immediately with cash, or
- They can repay it with a new personal loan for which a small part of the interest rate is tax deductible from their income tax, or
- They can repay the housing company loan according to the set repayment schedule. This last method is used by a buyer who is investing to rent who can set off the loan’s interest and repayment instalment against their rent income.
All residents of a housing company pay a monthly maintenance fee of around €4 a month per square meter for the annual upkeep of the building.
Residents are also directly liable for the costs of all major renovations of pipes, roof, windows, electricity, outside walls, painting, etc., also based on the size of their floor space. These costs can be between €500 to €1500 a square meter every 50 or 60 years depending on the complexity of the renovation.
The Finnish government has been getting nervous about the levels of home buyers’ debt, as well as the fast increase in new home prices.
They also nervous about the political red flag when construction companies advertise new apartments priced at 30% of their market value with 70% of long term debt in the name of the housing company. Many buyers think they are getting a good deal, without realising that they are on the hook for a huge debt! With interest rates near zero for many years already, it is only too easy to think that this will continue for many more years…
Many home owners of such highly indebted housing companies do not realise they all jointly liable for these loan repayments if any other resident defaults on debt repayment. If there is just on or tow defaults that is not a big problem – but the numbers add up quickly if more default as interest rates rise.
… and OP Bank, the big co-operative bank, was encouraging borrowers to not repay loans so they could use the “extra” cash for consumption! Any customer who was foolish enough to take advantage of this devil’s pact could have repaid a large part of their the housing loan during this exceptional period of ultra low interest rates. Now they remain at a greater risk level when rates move higher while our banker friends have reaped in higher earnings and received a bigger bonus.
It is no surprise then that a recent report from a government working group of “wise men” has proposed that debt should not exceed 4.5 times gross income for a maximum maturity of 25 years. The median income of most working people is €40 000 and that means that a working couple can borrow around €360 000 which would buy them a modest 75 – 85 square meter two bedroom apartment in Helsinki, or 100 square meter three bedroom apartment in the suburbs. They would then end up paying around €1 900 – €2 000 a month to cover the cost of the loan and maintenance, leaving them with €1 500 for food, utilities cloths, insurance, the car, the annual holiday an restaurants an Netflix…
They would lose another €500 is interest rates increased to 5 making life much harder and risky if one of them lost their job…
House prices in Helsinki have risen so sharply and young people just do not have sufficient income to buy, so they are forced to rent.
The recent housing boom has seen new apartments priced at 20% to 30% more than good quality older apartments in the same or better areas. There is no logic in this other than the construction companies determination to maintain a higher price level, which is not that hard given the small number of big companies. The future renovations of older buildings does not explain the price differential.
The latest new apartment blocks in central Helsinki are selling between €7 000 and €13 000 a square meter for individual private buyers. At the lower end that will give new young buyers a 56 square meter apartment for € 400 000 – not exactly Buckingham Palace. But you can buy an apartment next door for €10 000 a square meter if you really want to splash out – the only problem is that it is 30% smaller!
The price of new houses has increased by 15% during the last 4 years in Helsinki!
The price of new houses has increased by 15% during the last 4 years in Helsinki!You cannot be convinced about the virtues of zero interest rates when you see house prices climb this fast in the biggest cities in Finland.
Money from banks and investment funds has been pouring into the residential construction market for many reasons:
Banks like lending to the housing companies because the construction market is dominated by 4 or 5 big companies, which reduces the risk of surprises for the banks, and the all home owners are jointly liable if any resident cannot repay the debt according to the schedule. Banks also love mortgages for private home buyers because they have less risk when an owner defaults. The apartment can be easily sold and the owners remains on the hook for the unpaid loan for many years.
Investment funds are now looking for higher less risky returns when we have near zero interest rates in the money and bond markets. Rental accommodation offers a higher return (or so they hope). The building boom has left many apartments unsold so the investment funds have moved in and offered to buy whole blocks of apartments at a 20% to 30% discount to which the construction companies have agreed. Smaller profits but on a bigger volume is fine as the boom starts to slow down…
So those young people and workers who need to live in Helsinki and in other big cities who cannot afford to buy at least get a roof over their head by renting – and rents are falling with increased supply… at least that is the theory.
According to the official statistics form the rents have not yet fallen… they have gone up by around 6% during the last 4 years.
Graphs: Statistics Finland