Fly to let landlords with holiday homes in Finland should keep a wary eye on property values as the country’s Ministry of Finance is again warning of a deepening housing bubble.

Prices have continued to climb in the country and are now ranking higher than ever before. And the ministry’s Undersecretary of State Martti Hetemäki has now suggested on a news broadcast on the Finnish Broadcasting Company (YLE) that the price bubble in housing and a collapse of the market are just a matter of time.

However Martti Nyberg, the head economist at Nordea Bank, disagrees. He claims there is no housing bubble because there are rational reasons for the rise in prices.

Housing prices declined by around seven percent during the recession and now have returned to the previous trend of growth,” Nyberg says.

In addition, he claims, interest rates are low and consumers favour ownership. Therefore, high demand is what is raising the prices. The third and most important reason, in Nyberg’s opinion, is that for families, the costs of borrowing are significantly smaller than before in relative terms.

“At the end of the 1980s and the beginning of the ‘90s, 25 percent of the gross income of a family with two people working went into amortisation of loans and interest on those loans,” he said.

“Now a typical working couple spends just eight percent of gross income on servicing their loans.” Bank of Finland Section Chief Antti Suvanto says the housing market has become slightly overheated.

Nevertheless, he also does not forecast a bubble of the kind that occurred in the late 1980s, when it was a common practice to buy properties with borrowed money, while anticipating a rise in prices.

Suvanto feels a key factor warming up the housing market is the low interest rate while at the same time the servicing costs of old debts has lowered, increasing the amount of disposable income and supporting domestic demand and employment.

Suvanto points out that while European financial stimulus has taken place not just for Finland’s benefit, its impact has been considerable in Finland.

The reason for this is that Finnish housing loans are tied mainly to short-term interest rates.

“It is wonderful that domestic demand did not collapse at the same time that exports fell, which is what happened in the 1990s,” he added.

However, Suvanto does not feel interest rates are the only factor contributing to the rising prices.

In Sweden prices have risen even more and prices have also been rising fast in Norway, which is not a member of the EU. However, in Germany, prices have not risen in the entire decade, even though the interest rate level is low.

“In countries where housing loan interests are fixed, or where they rarely change - that is, they are tied to long-term interest rates - the housing market operates in a more stable manner,” Suvanto says.

Even if there is no speculative bubble, Suvanto feels it would be good to approach the market with caution.

“The pace of rising prices and the willingness to borrow money are not a good combination with the prospects for the economy.

“No boom years are on the horizon, so there is also a risk of incurring too much debt.”

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