The Unassuming Economist

The IMF’s latest report on Finland says:

“Credit has expanded moderately overall, but housing corporation loans and consumer credit have been rising more rapidly. Total loan growth to the private nonfinancial sector has remained broadly constant at around 3½ percent for the past five years. Most lending to households has been in the form of secured lending for housing, which has grown around 4 percent. Corporate loan growth has rebounded strongly in the second quarter of the year after a sharp contraction in the second half of 2017. Two lending categories stand out:

 

 

Loans to housing corporations have been expanding rapidly—above 10 percent—for many years. The drivers—expansion of the housing stock and renovation of rental properties—are
healthy. But the shareholders of housing corporations include homeowners, making these de facto indirect loans to households, and households might thereby be tempted to take on more debt than can easily be repaid.

Consumer credit has been increasing steadily—above 7 percent y/y in the second quarter of 2018—and now accounts for 12 percent of aggregate household debt, driven by credit
institutions easing lending standards and a rapid increase in non-bank lending. The expansion has been associated with an increase in payment defaults.

Household debt has been increasing steadily, despite the increase in real disposable incomes. Saving rates are lower than peers, although some of the difference is attributable to Finland’s public pension system. Household debt remains lower than Nordic peers, but is expected to increase further. Highly-indebted households (i.e. those with debt greater than four times their income) accounted for over a quarter of borrowing in 2016; preliminary survey data for 2017 indicate that the typical new borrower for housing purchases is taking on leverage of 4½ times income. The share of floating rate loans in household lending is high, exacerbating households’ vulnerabilities to interest rate and/or income shocks, although this is mitigated by the prevalence of mortgages with annuity repayments.

Residential real estate markets do not seem overheated overall, but demand still exceeds supply in major metropolitan areas, and commercial real estate may expose the economy to shocks. Housing starts and completions have been elevated, but price increases in greater Helsinki suggest demand still outstrips supply. Across the whole country, house price increases have been modest, especially in comparison to Nordic peers, with house price deflation in regions outside greater Helsinki. Price-to-income and price-to-rent ratios have not risen much during the recent economic recovery. Low and declining yields in commercial real estate suggest relatively high valuations.

The authorities have tightened credit policies. A floor of 15 percent on the average risk weight for housing loans took effect in January for institutions using internal risk-based (IRB) models. Effective July, the maximum loan-to-collateral (LTC) ratio for housing loans (excluding loans on first homes) was cut from 90 to 85 percent.

The recent tightening is appropriate, but policy could be more effective if the toolkit were modified. Although overall household debt and leverage are not high in comparison with other Nordic countries, there are some cohorts that are increasingly vulnerable to income and/or interest rate shocks—which, in view of the concentration of total lending in real estate, opens the financial system to risks.

The current cap on mortgage loans relative to collateral could usefully be replaced with a cap relative to the value of the property, as is common in other countries. And because the
underlying problem is more the level of debt than housing valuations, it would be useful for the authorities to have debt-based macroprudential tools (such as debt-to-income or debt-service to-income caps) at their disposal should leverage become more stretched. Applying such tools well depends on accurate information. Staff supports the recent Justice Ministry recommendation for the establishment of a “positive credit register”—i.e. a database that credit firms and the FINFSA could use to obtain real-time information about customers’ debt and income levels. A new challenge arises from non-bank lending, including online platforms such as peer-to-peer lending, which is not being recorded in credit statistics and registers.

The growing reliance on consumer credit, especially that provided by non-banks and via digital platforms, raises additional concerns. Some of these outlets are not regulated and provide cross border financing. Attempts were made to circumvent legally-binding interest rate caps, raising the question of whether borrowers—especially those dealing with non-bank lenders—are sufficiently informed about the conditions of their loans. The authorities are amending the legislation on interest rate caps to close loopholes. Additional consumer protection measures are needed and require more data collection, especially on consumer lending provided through digital platforms. Tighter prudential requirements to demonstrate creditworthiness could also be considered.

Macroprudential authority tools should not be expected to solve underlying supply problems. The authorities have already implemented measures to expand housing supply in urban areas, including Helsinki. The government provides considerable support for social housing, which should make it easier to move across regions. But property taxation could be deterring mobility: recurrent property taxes collected by municipalities tend to be low, with some exceptions, while transaction tax rates are steeper at 4 percent.”