The coronavirus pandemic has the potential to aggravate long-standing vulnerabilities in the Nordic housing market. Housing market disturbances can increase credit risk for banks and interfere with their access to funding.
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The more debt households take on during an economic upswing, the more likely they are to cut consumption when the economy begins to run out of steam.
An extensive materialisation of risks on the Swedish housing market could also have notable effects in the other Nordic countries.
Housing debt has grown, both in absolute terms and relative to income, especially in growth centres, where housing is more expensive and subject to greater pressures from demand than elsewhere.
When indebted households cut their spending during an economic downturn, this also increase the financial difficulties of non-financial corporations.
Households in both Finland and Sweden are carrying a record level of debt relative to their income.
In Finland, the volume of housing loans is large compared with other bank lending and the capital requirements on the banks. Vulnerability is further increased by the relative size of household debt and the tendency for assets to be held in housing.
Realisation of potential housing market risks would simultaneously increase loan and investment losses while also pushing up the price of funding.
In Finland, banks’ most important source of earnings, the interest margin, is now under pressure from a number of directions.
Housing debt is concentrated in the Helsinki metropolitan area and other growth centres, where housing is more expensive. A large proportion of loans is borne by a small proportion of households.
A larger average loan size and longer loan repayment periods have permanently increased household vulnerability. In recent years, debt developments have levelled off.
The impact of regulation on growth in loan margins has been exaggerated. The impact is strongest in high-risk loans.