Martti Nyberg of Nordea Bank sees no housing market bubble

Low interest rates do not explain everything, says Antti Suvanto of Bank of Finland

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By Jarmo Aaltonen
     
      the Ministry of Finance is again warning of a deepening housing bubble. Prices of dwellings have continued to rise in Finland and are now higher than ever.
      The ministry’s Undersecretary of State Martti Hetemäki 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.
      Martti Nyberg, the head economist at Nordea Bank, disagrees. He says that there is no housing bubble because there are rational reasons for the rise in prices. Bubbles emerge unexpectedly, and for no visible reason, he points out.
     
The rational reasons that he sees are as follows: Housing prices declined by about seven per cent during the recession, and now have returned to the previous trend of growth. And when the construction of new housing ended, rental properties disappeared from the market. In addition, 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 per cent of the gross income of a family with two people working went into amortisation of loans and interest on those loans. Now a typical working couple spends just eight per cent of gross income on servicing their loans.”
     
Bank of Finland section chief Antti Suvanto says that the housing market has become slightly overheated. Nevertheless, he also does not see a danger of a self- perpetuating speculative bubble of the kind that occurred in the late 1980s, when it was a common practice to buy properties with borrowed money, anticipating a rise in prices.
      Suvanto feels that a key factor warming up the housing market is the low interest rate level, which directly increases people’s willingness to borrow money, while at the same time lowering the servicing costs of old debts, thus 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.
     
Although stimulus has a powerful impact on the Finnish housing market, Suvanto feels that it has prevented the emergence of a slump in construction, which would have had serious consequences on other consumption.
      “It is wonderful that domestic demand did not collapse at the same time that exports fell, which is what happened in the 1990s.”
     
However, Suvanto does not feel that interest rates are the only factor contributing to the rising prices. In Sweden prices have risen even more, even though, as a country outside the euro zone, it has its own monetary policy. 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 there as well.
      “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 that it would be good to keep at least a yellow light on.
      “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.”
     
Helsingin Sanomat / First published in print 7.8.2010


Previously in HS International Edition:
  Interest rates on new housing loans fell in April (1.6.2010)
  IMF says Finland should consider abolishing tax deductibility of home loan interest (8.6.2010)

JARMO AALTONEN / Helsingin Sanomat
jarmo.aaltonen@hs.fi