Housing market|Falling housing prices can be both a good and a bad thing. The economist explains why this is and what the situation is now.
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Housing prices in Finland have developed at the slowest rate in the EU.
In April–June, housing prices in EU countries rose by an average of 2.9%, in Finland they fell by 4.8%.
According to Suomen Yrittäjie’s Chief Economist Juhana Brotherus, the drop in housing prices can be due to both reduced demand and increased housing supply.
In Finland, an exceptional number of apartments have been built between 2018 and 2023 in relation to the population.
Is it falling housing prices good or bad?
HS told on Wednesday, how housing prices elsewhere in Europe have risen at the same time as they have fallen in Finland. Housing prices in Finland have developed at the slowest rate in the EU for a long time.
Many HS readers have wondered why apartment prices should rise. Can’t falling prices also be a good thing, because it can make it easier to buy a home?
Juhana Brotherus
Suomen Yrittäjie’s chief economist, who has followed the housing market for a long time Juhana Brotherus says that the matter is not entirely one-sided. It depends on why the prices are going down or up.
A drop in prices is a bad thing if the reason is reduced demand.
That is, when, for example, the economy stagnates, unemployment increases and consumers’ disposable income decreases, falling house prices indicate a bad economic situation in general.
According to Brotherus, a drop in prices can be a good thing if the reason is an increase in housing supply.
That is, when enough new apartments have been built in desired locations and there is no longer a need to compete for them, prices have not risen, but have even fallen.
In this case, the drop in prices is a good thing from the point of view of households and the national economy.
“Right now there are clearly both reasons behind it, and the drop in prices or weakness in relation to other countries is not entirely a bad thing,” says Brotherus.
Good is that the supply of apartments has grown rapidly.
According to Brotherus, an exceptional number of apartments have been built in Finland between 2018 and 2023, in relation to the population and population development prospects.
In the 21st century, in several years, even more apartments have been built in Finland than in Sweden, which has twice the population and whose population is expected to grow, unlike in Finland.
The number of housing starts peaked in 2021, up to 47,000 per year. According to Brotherus, the last time this much was built was before the recession of the 1990s, when population growth in Finland was at a completely different level.
The amount is much more than the estimated housing need, which is 30,000–35,000 new apartments per year.
Some of the new apartments are still unsold.
In many European countries, on the other hand, the problem has been too little construction. According to Brotherus, it has contributed to the fact that house prices elsewhere have risen more.
“I think it’s good that a lot has been built in Finland. Even more should have been built in the desired areas and should continue to be built,” he emphasizes.
Bad development in Finland, however, is that the drop in prices is also due to the decrease in demand for apartments.
It, in turn, tells about Finland’s long-standing weak or non-existent economic growth. It shows in consumers’ wallets.
“The standard of living of Finnish households has developed clearly worse than, for example, in Sweden or elsewhere in Europe,” says Brotherus.
Of course, even now, the drop in prices can benefit some households, i.e. those who do not yet own an apartment or are about to change to a bigger one, Brotherus reminds.
Apartments falling prices can also have other indirect effects on the national economy. The matter has been studied around the world.
Especially in the United States, it has been observed that housing price changes have so-called wealth effects. When housing prices fall, households may feel more deprived than before and their sense of security may be shaken, Brotherus explains.
This can cause households to save and reduce their consumption, which in turn weakens economic growth.
Reciprocally, when house prices rise, households feel that their wealth is growing and are encouraged to spend more. In turn, it accelerates economic growth.
What all this should be thought about?
So are the consumers who are happy about the drop in prices right?
“Households’ knee-jerk reaction to falling prices is partially correct. Although the drop in prices most typically indicates a lack of demand and a bad economic situation, recently construction has been so exceptionally abundant that the increase in supply is now also important,” Brotherus sums up.