Price development of residential markets predictable 

The price development of housing in Finland is highly predictable over short interims. On the basis of the capital city (Helsinki) region, it is possible to forecast price changes in other residential markets as well. The thesis study by Elias Oikarinen, Licentiate in Economic Sciences, indicates that no ‘bubble’ occurred in housing pricing at least a year ago in the capital city region. Studies on Housing Price Dynamics, a doctoral thesis in economics, shall be examined at Turku School of Economics on 14 Sept. 2007.

In Elias Oikarinen’s thesis study, the dynamics of housing prices in Finland are reviewed empirically from various perspectives. The study indicates that residential prices are quite predictable, at least during relatively short interims. The development of housing prices can be predicted by means of fundamental economic variables. These variables are, e.g., population, income level, household loan stock and interest rate.

According to the study, housing prices and household loan stock show strong interaction. The previous price development proper to housing as well as stock market price developments also show significant predictive vigour. The predictive capacity of the stock market with respect to housing prices has, however, weakened with the freeing of the finance market.

The capital city (Helsinki) region: no housing price ‘bubble’

“On the basis of empirical analysis, the capital city region did not experience any housing price ‘bubble’ at the mid-point of 2006,” Elias Oikarinen reckons. ”Residential prices have risen steeply, because the area’s income level and population have increased substantially and, at the same time, the loan restrictions on households and liquidity limitations have slackened.”

It can be expected that the rise in residential prices in the growing city area will be faster than general inflation over the long term. In the capital city region, the rise in prices for homes is being accelerated by the fact that the sea limits the growth in housing stock in many directions.

Mr Oikarinen predicts: ”The elevation in the interest rate and fluctuation in the stock market during the last year forecast that the rise in residential prices is relaxing, at least temporarily.”

On the basis of the capital city region, it is possible to forecast ensuing price changes in Finland’s other regional housing markets as well. Changes in the residential prices in regional centres also serve to predict changes in the surrounding region. According to the study, the prices would appear to react to economic changes faster in the central cities than in the countryside.

Covariation of the housing and stock markets subject to risk

According to the thesis study, the benefits of geographical decentralization in one’s residential investment portfolio from the perspective of a large portfolio investor – for example, a mutual pension insurance company – are minimal in Finland. Over the long term, the advantages of decentralization are small between the housing market and the stock market as well. Increase in a highly decentralized domestic stock portfolio into a decentralized Finnish housing investment portfolio does not bring great decentralization benefits when the investment horizon is several years. Instead of this, the decentralization of assets with regard to a single household into an owned flat and shares may reduce the risk of an investment portfolio significantly.

From the perspective of the economy, strong covariation of the housing market  and the stock market is unfavourable. Stock assets – particularly housing assets – substantially impact household consumption. This being the case, a simultaneous drop in prices could result in considerable negative impacts on the entire national economy. Elias Oikarinen’s study indicates, however, that the reaction of the residential market to changes in the stock market has abated during the last fifteen years with the freeing of the finance market.