Finnish authorities lack adequate means to contain the growth of housing loans and other lending and to address the changing structure of household debt. “The macroprudential toolkit available to authorities must be expanded with instruments that restrict credit demand and which set restrictions on loan-to-income ratios”, stated Marja Nykänen, Deputy Governor of the Bank of Finland. “The range of tools has to be sufficiently robust that it can restrain borrowing wherever necessary, regardless of the source or purpose of financing. This issue will only become all the more important as non-bank lending continues to grow”, added Ms Nykänen.
Many historically severe financial crises were not only preceded by a run-up in lending for house purchase and high household debt, but were often exacerbated by such. Heavily indebted households are prone to restrict their consumption in times of economic disruption, reducing demand for domestic products and services and raising unemployment. The subsequent deterioration in business conditions weighs on companies, increasing banks’ credit default losses and eroding their lending capacity. The resulting decline in aggregate demand and reduction in lending further upsets an already strained economy.
An increasing share of households’ housing debt is formally held by housing companies, where repayment is assumed by the company’s shareholders. These so-called ‘housing company loans’ are used to finance both new-build construction as well as renovation work on existing properties. In particular, housing company loans have been used to complement private mortgage borrowing and loans for real-estate investment in the purchase of new-build residential properties, where they are often used to finance a significant share of the property's debt-free price. Total living expenses and debt-servicing costs have been made all the more difficult to assess by lot renting, the sizeable debt shares held by housing companies, and lengthy amortisation-free repayment periods.
An increase in the length of repayment periods and the rise of housing company loans have fuelled household indebtedness, and have contributed to an increasingly unclear picture of the broad risks involved. Excessive debt growth increases the housing market's and economy's vulnerability to shocks.
Consumer credit lending has similarly experienced brisk growth. The volume of high-cost short-term credit, i.e. payday loans, currently comprises only a small share of total consumer credit, but one which has grown rapidly. Payday loans are often associated with individuals who have difficulties managing their personal finances. Over 380,000 Finns already have entries of late payment or default on their credit reports, the majority of which are related to consumer credit. Establishment of a positive credit register containing relevant information on households’ credit histories would provide lenders with a better view of outstanding credit risk. Similarly, the register would also grant authorities access to important data on the structure and distribution of household debt.
For further information, please contact Marja Nykänen, Deputy Governor of the Bank of Finland, tel. +358 9 183 2007, or Paavo Miettinen, Head of Division, tel. +358 9 183 2330.