The Bank of Finland has issued the government a stern warning about the recent reforms regarding housing loans.
The government made three key changes to housing loans as it decided on the state budget this spring.
It extended the maximum term of housing loans to a period of 40 years. Secondly, it also extended loan terms to 40 years for housing companies, with the option of taking a two-year repayment holiday.
The third reform was reducing required downpayment amounts of so-called ASP loans (government-subsidised mortgages) from 10 percent to five percent of the loan total.
The government said the changes were aimed at boosting the housing market and easing first-time home purchases.
BoF: Minimal impact likely
According to Marja Nykänen, the central bank's deputy governor, the rule changes would not help stimulate the housing market quickly.
"The assessment is that the impact at the moment may well be very small. If households are already uncertain about their own finances, their jobs, and their prospects from the outset, then a 40-year loan may not necessarily seem attractive," Nykänen said.
Instead, she said that in the long term, the longer loan period would lead to rising housing prices.
"Then, when housing market activity picks up one day, larger loans can lead to greater household debt," she explained.
Nykänen said she was particularly concerned about allowing longer loans for housing companies. A 40-year loan could mean that a housing company would need to take out a renovation loan before paying off the initial construction loan.
Banks pleased
Banks, on the other hand, were pleased by the extended housing loan periods.
For example, Nordea praised the government's decisions right after this spring's budget talks.
At the time, Nordea Mortgage Bank's CEO, Jussi Pajala, suggested that the changes would help turn around the housing market and, more broadly, stimulate the economy.
That view is based on the idea that longer loan terms would mean smaller monthly installments for mortgage holders, leaving them more money for consumption or investment.
However, the Bank of Finland's Nykänen does not agree with that logic.
"I fully agree that we need to grow the economy, but achieving growth through debt may not necessarily be the path to sustainable growth," she said.
The power of household debt
Nykänen also noted that excessive household debt can lead to problems in the entire national economy. A cautionary example was seen when, due to the war in Ukraine, interest rates began a rapid rise to more than four percent.
Now interest rates are rising again, this time due to the war in Iran.
In practice, rapid interest hikes mean larger monthly installments for mortgage holders, which in turn causes households to spend less and cut consumption. At worst, interest rate increases can cool off the entire national economy.
However, the government did not listen to the central bank's warnings about the matter, as it was preparing the reforms.
Longer mortgages, larger loans, higher prices
The Bank of Finland has clearly stated that it disagrees with the government's decisions regarding mortgage lending regulations.
However, Nykänen took care not to condemn the government's decisions.
"We have democratically elected decision-makers making political decisions, and my task as a central bank official is not to evaluate them," she said.
But she did not hesitate to discuss the dangers associated with those decisions.
"We already said during the consultation phase that the idea that these [changes] would enable a family to save and invest is good — as an idea. But historical data shows that longer loan periods lead to larger loans and indirectly also raise housing prices," Nykänen explained.
