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Finnish capital region could see 10% drop in house prices due to rise in interest rates

RISING INTEREST RATES are dragging down house prices particularly in the capital region, reports Helsingin Sanomat.

House prices have skyrocketed in recent years and decades, spurred by a sustained era of low interest rates. Nordea has estimated that decreasing interest rates accounted for one-fifth of the 125-per-cent surge recorded in house prices in the capital region between 2000 and 2022.

Interest rates on housing loans were around five per cent at the turn of the millennium.

Juho Kostiainen, an economist at Nordea, told Helsingin Sanomat last week that low interest rates tend to drive up and low interest rates drive down house prices. Euribor 12, the most common reference rate for housing loans in Finland, has surged from -0.5 per cent to roughly 3.3 per cent since the beginning of 2022.

Kostiainen revealed that an increase of one percentage point in interest rates computationally results in a drop of 3–5 per cent in house prices in the capital region. The prices could thus theoretically decrease by as much as 10 per cent once interest rates have been adjusted for all mortgage borrowers.

As house prices are also affected by factors such as wage development and the employment situation, Nordea has estimated that the actual drop will be around five per cent in 2023. A similar forecast has been published by OP Financial Group.

Statistics Finland has reported that the nominal income of full-time wage earners increased by 2.3–2.9 per cent year-on-year in the third quarter of last year. Real income, however, decreased by 4.8 per cent as wages were comfortably outpaced by consumer prices.

With rising interest rates and cost of living gnawing away at the disposable income of households, the real estate market has already slowed down sharply. Both Kiinteistömaailma and OP Koti, the real estate arm of OP Financial Group, registered a 10-per-cent year-on-year drop in brokered sales in December.

The effects of interest rate hikes are tangible particularly in the capital region, where house prices and, as a result, housing loans are higher than in other parts of Finland.

“Where house prices are higher to begin with, the interest effect is greater,” said Kostiainen.

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