Finns learning to live with newfound wealth
Bulk of savings still in real estate and bank accounts
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By Matias Möttölä
It was not that long ago that Finns subsisted on macaroni casserole and pea & ham soup, and vacations meant a trip by car to Sweden or a package tour to Greece. They bought only what was absolutely necessary.
Nowadays, many Finns want much more – and they can afford it, too. Weekday dinners include special cheeses, exotic fruits, and sushi. Thousands of families have visited places like Thailand and Sri Lanka.
And even though Finnish families spend much more money than they used to, more and more people are able to save and accumulate wealth.
In fact, Finns have had so much money left over that the value of the savings Finns have in bank accounts, equity, and mutual funds has doubled over the past ten years. The value of households’ financial assets tops one hundred billion euros.
"Now we have truly grown wealthier", managing director Matti Inha from the Mortgage Society of Finland sums it up.
Half of the population put money aside regularly, and this share is growing all the time. The largest savings are usually accomplished by middle-aged Finns who are nearing the end of their careers, are enjoying their largest pay checks, and have paid off their housing loans.
The total value of Finns’ assets is much larger if real estate is included. The value of Finnish homes has risen rapidly after the recession of the early 1990s.
When real estate is included, the assets of Finns amounted to some 250 billion euros in June. Housing loans have been deducted from this figure.
The value of assets per capita amounts to some 49,000 euros. This figure comes from an analysis prepared by Investment Research Finland and Helsingin Sanomat, based on data from the Finnish Bankers’ Association and Statistics Finland.
Naturally, not all citizens have enjoyed newfound wealth and prosperity. Income gaps are widening, and a significant portion of Finnish wealth is in the hands of a small elite.
Finns save mainly by buying their own home, and by keeping their money in bank accounts. Around sixty percent of an average family’s wealth is in real estate, and one fifth in bank accounts.
Few people see their house or apartment as an asset, however. "For most of us, it is just our home", remarks economist Tarja Svartström from the Nordea Bank.
The recent rapid rise in housing prices has made many Finns wonder what they could buy by selling their home. Prices have risen so quickly in the Helsinki metropolitan region in particular that many people have started to believe in a perpetual process: you can definitely pocket more when you sell your apartment than what you paid for it. The fastest spikes in housing prices were witnessed in the latter half of the 1990s.
"Many people confess to reading ads in the newspapers on a weekly basis to see what their home would cost. It annoys people if the value has fallen."
According to Inha, Finns should acknowledge that homes are expensive in the country nowadays.
"Finns have lived in cramped homes, and over the past few years, they have wanted to improve their living standards. However, there have been too few high-quality homes on the market, and the rise in demand can be seen in the prices. Therefore, the quality of living has not improved at the rate the prices would lead you to believe."
Is there a bubble in housing prices, or are we witnessing a normal rise in value as a result of increasing wealth?
No one knows the answer, but it would be exceptionally important for Finns. A fast rise in interest rates could make life difficult for many families.
Although the share of real estate and bank account savings in Finnish portfolios is exceptionally large, Finns are discovering new ways to invest.
The Finnish media devotes much time and space to stock market investing, but only one in four households own shares. Shareholders are to be found mainly in Southern Finland, and they consist of wealthier, older people. The number of shareholders is gradually falling.
The popularity of mutual funds and investment through insurance policies already beats that of direct equity ownership.
The value of mutual fund investments has grown particularly fast. At the turn of the millennium, only 15 percent of Finns had invested in mutual funds, now they are owned by one in four.
The value of the mutual fund investments of private individuals has grown by 25-40 percent annually, and this trend seems to be continuing.
The consumer survey of Statistics Finland reports that more than one in five Finns plan to invest in mutual funds during the next twelve months. The sales of investment-linked pension insurance policies have also been strong, despite the fact that the tax treatment of these additional pensions was recently tightened in connection with the capital gains tax reform.
New types of investors are entering the market and exploring its opportunities and risks through mutual funds. They are often middle-aged people without prior experience in investing.
Many of these new investors have started out cautiously by investing in low-risk money market or balanced funds.
Equity markets require more information and experience. "The last time the stock market peaked, Finns and Greeks still increased their equity fund investments when the prices hit the top. In the U.S. and Sweden, investors were pulling out at that point. Our traditions in mutual fund investing are short", Svartström observes.
"It will require some more practice and courage before we know how to enter the market at the right time, and dare to hold on to our mutual funds during the next slump", Svartström muses.
The popularity of mutual funds and insurance policies is a part of a larger change. Finns are only beginning to learn that assets form a whole that you can diversify even if you are still paying your housing loan.
"Finland is heading into the same direction as Sweden, for example. People used to focus on paying back their loans, but nowadays it is more common to let both sides of a person’s 'balance sheet' grow", estimates bank manager Mikko Hyttinen from the OKO bank group.
"It is no longer exceptional for the same person to have savings and loans. And that is not necessarily a bad thing", Matti Inha says.
Young couples may decide to take out longer housing loans so that they can afford to put money aside in mutual funds in addition to the loan repayments.
The younger generation is also more aware than their parents that when saving for decades, the stock market pays better than bank accounts or the money market. If one invests in shares for 20-40 years, it is quite certain that the investments will earn a better return than the interest rate on a housing loan.
"We feel that it is sensible to invest while paying off a housing loan. I cannot say that very many people choose to do so, but the subject is brought up when a customer’s situation is assessed", says Sampo Bank regional director Kenneth Kaarnimo.
Modern Finns do not want the purchase of a home to limit their possibilities for consumption either. "People have started to enjoy their lives in a different way from before. The costs of a housing loan are adjusted so that there is money left over for other things", Svartström explains.
Bank of Finland economist Kari Takala believes that housing loans of the current size would not be possible for many younger homeowners without a certain confidence they have in their parents. Many rely on future inheritances when planning to buy a home.
"Parents act as a type of insurance even if they do not directly guarantee a loan or help finance a deal. Otherwise, I doubt many people would dare make such large loan commitments."
Helsingin Sanomat / First published in print 13.11.2005
MATIAS MÖTTÖLÄ / Helsingin Sanomat
Finns learning to live with newfound wealth