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The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of Finland 2006 published on 4 May 2006.
Contents
Although there is no sign of imminent macroeconomic instability stemming from the housing market, the Finnish housing market has historically been amongst the most volatile in the OECD. While the level of household debt is currently low in international comparison, it has been growing rapidly in recent years, and mortgages are overwhelmingly financed at short variable rates, so that household disposable income is vulnerable to changes in interest rates. The government currently operates a mortgage loan guarantee scheme, which in 2004 covered one quarter of all new mortgage loans. Consideration should be given to phase out or better target this scheme in such a way that it will not undermine the risk awareness of home buyers. While the restricted deductibility of mortgage interest expenses is intended to facilitate access to home ownership, the effect is probably capitalised in higher house prices and it may also add to housing market volatility. Furthermore, as the imputed rental income and capital gains from home ownership are not taxed, while property taxes are relatively low, the deductibility of mortgage interest expenses favours home ownership over other forms of investment. The government should therefore take advantage of the currently low level of interest rates to begin scaling back mortgage interest deductibility, possibly in the context of a more comprehensive reform of housing policies and taxation.
Term structure of household mortgage debt
2002 or nearest available year
Source: OECD, OECD Economic Outlook, No. 78, December 2005, Table III.1.
The shortage of building land in the fast-growing regions may partly reflect municipalities’ disincentives to provide land for new housing, since municipalities are responsible for financing the expensive infrastructure and services in urban areas required to support population growth. One way to encourage municipalities to provide more building land is to promote the use of the property tax as a source of tax revenue and to extend the tax base to undeveloped land, which is currently not taxed. This would require further easing the limits imposed on municipal property tax rates. This might have the further advantage of shifting the burden of taxation away from labour towards property which is currently at a low level by international standards. In order to further enhance the incentives of municipalities, property tax revenues could be exempted from the fiscal equalisation scheme. The incentives could also be promoted by allowing municipalities to tax the increase in the value of building land provided for housing or by making more effective use of the options for the municipalities to use their preferential right to buy land and to charge building developers for the costs of new infrastructure.
Property taxes are low
As a percentage of GDP, 2004(1)
1. 2003 for Australia.
Source: OECD, Revenue Statistics, 1965-2004, 2005 ed.
Another factor restricting the supply of new housing is lengthy and bureaucratic planning procedures. In particular, there are multiple possibilities to appeal over the decisions concerning building permits and local plans. The applicants and third parties have the right to challenge the decisions in both the regional and supreme administrative court and the average length of proceedings is relatively long. The multiple possibilities to appeal over the decisions concerning building permits and local plans should be constrained without hampering the due process of planning.
Nearly three-quarters of Finland’s population is eligible for social housing programmes and even relatively high income earners live in government subsidised housing. Limiting the eligibility to social housing would save money, with probably little implication for social objectives, while stimulating the private rental sector. The housing allowance system should also be reformed. The magnitude of the allowance should be linked to the average rent in the region, rather then the actual rent paid, which would reduce the cost of the scheme and allow households to choose the quality and price of the housing.
How to obtain this publication
The Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Finland 2006 is available from:
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SourceOECD for subscribing institutions and many libraries
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OLISnet, under "Publication Locator", for government officials with accounts (subscribe)
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Additional information
For further information please contact the Finland Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Dave Turner, Asa Johansson and Laura Vartia under the supervision of Peter Hoeller.
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