Housing market | The high leverage of housing investors creates risks for the economy, experts warn

The popularity of housing investment in Finland has clearly grown in recent years. With the increase in interest rates and costs, the risks have increased significantly, according to the Bank of Finland’s experts.

Housing investors the debt situation creates risks for the economy when interest rates rise at the same time as the number of homes for sale and economic uncertainty increases, it appears From the analysis prepared by the experts of the Bank of Finland.

The risks are especially related to loans of highly leveraged households and other private housing investors. The analysis was written by a senior economist at the Bank of Finland Kimmo Koskinensenior economist Ville Voutilainen and advisor Hanna Putkuri.

The rapid rise in interest rates increases investors’ costs, depending on how the investment is financed. Risks related to indebtedness and housing investment can materialize, especially if professional investors and households have not protected themselves from rising interest rates or prepared for rising costs sufficiently with financial buffers.

It is known that housing association loans in particular have very few interest rate protections, i.e. most of them have variable interest rates.

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At the time of zero interest rates, the large housing association loans for new developments, combined with the low interest rates of investment housing loans, have encouraged some housing investments to use high debt leverage. In recent years, the corporate loan share in new properties has usually been around 60–75 percent of the debt-free price of the apartment.

Now that the economic uncertainty is increasing and the housing trade is fading, debt leverage can intensify the cyclical fluctuations of the housing market and construction, according to experts. The decline is therefore steeper compared to a situation where debt leverage would not have been used.

Professional ones housing investors have maintained the pace of new construction in recent years. According to the analysis, in recent years, investor sales have covered approximately 40–90 percent of the sales of new apartments at large construction companies.

The popularity of housing investment has also clearly grown in recent years. The analysis states that according to the Tax Administration, there were almost 308,000 people in Finland in 2021 who had taxable rental income from condominiums. The number of people receiving rental income has increased by 24 percent since 2014.

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Experts write that the net income of apartment investors threatens to weaken due to weak rent development and rising costs, i.e. galloping inflation and rising interest rates.

According to the Bank of Finland’s experts, the situation can also lead to management problems for housing association loans if investors cannot get the apartments they own rented out. The problems are exacerbated if the investors have a large share of the company’s stock.

If the demand for rental apartments weakens and costs rise, investors may also be forced to sell their properties. According to experts, this cycle of events would affect the supply and price development of apartments more broadly.

“However, it is difficult to predict the development of credit risks caused by apartment investors, as investment activity has grown significantly in recent years, and no information on losses incurred by investors is available from previous crises,” the experts write.

Also household problems can also be reflected in the economic cycle, experts write.

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For households and non-professional investors, the risks are related to the rapid growth of financing costs and other expenses, an unexpected decline in the level of income, and an increase in the debt service burden.

“Households often first compromise on consumption expenditures other than loan payments and own housing costs, which can also indirectly weaken the economic cycle.”

Bank of Finland according to experts, the rapid rise in interest rates and the slowing down of the housing market also increase banks’ credit risks. So far, however, the non-performing, i.e. long overdue, loans of mortgage debtors, real estate companies and housing associations have remained very small in relation to the loan base.

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