Finnish household debt is looming worry in OECD review

FINLAND’S government needs to revisit a key measure it turned down earlier this year to curb risks to households in servicing their mortgages just as the real estate market heads towards a slowdown, according to the Organisation for Economic Co-operation and Development (OECD). 

The OECD urged the authorities to follow up their recent move of capping the maturity of new mortgages at 30 years by also introducing debt-service-to-income (DSTI) or loan-to-income (LTI) restrictions on households, it said in a report on Thursday (Dec 15).

Finland’s financial watchdog recommended in June a “stressed” DSTI ratio, which is calculated taking into account the servicing costs of a borrower’s entire debt. However, the Finnish government chose not to give the regulators the power to introduce it due to concerns that it could disproportionately affect first-home buyers. 

The OECD said that impact could be eased by setting a higher DSTI cap for first-home buyers.  

OECD’s recommendations for tighter control of household borrowing come just as the Finnish housing market is cooling with mortgage borrowing falling to the lowest level in four years. Finland’s biggest mortgage lender OP Group said on Wednesday that it expects house prices to decline next year by 5-7 per cent in the greater Helsinki region, and by as much as 5.5 per cent outside the capital. 

Residential-and commercial real-estate loans comprise 40 per cent and 28 per cent of the total loan stock of Finnish lenders, respectively, which the OECD says is “high by international comparison”. Other vulnerabilities include large real estate loan exposures in the other Nordic countries too, the organisation added. Neighbouring Sweden is now in the midst of a sharp housing market contraction that threatens to deepen a looming economic slump.  BLOOMBERG