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Finland's central bank urges household debt-to-income caps

The country's economy has survived the Covid crisis better than expected, but ballooning household debt threatens its economic security, the Bank of Finland says.

Myytävänä oleva yksiö.
The Bank of Finland says debt-to-income limits are needed to ensure the country is prepared to face future economic crises. Image: Petteri Bülow / Yle

The persistent, growing debt of Finnish households poses a threat to the country's abilities to deal with economic crises in the future, the Bank of Finland said on Tuesday.

At the same time, the central bank said the country's economy had survived the coronavirus crisis better than anticipated. It said the country's "strong monetary and fiscal policy stimulus" packages, flexible bank loans as well as other banking regulations had helped the Finland's businesses and households.

However, the growth of housing mortgage loans that began last summer has contributed to more household debt burdens, according to the central bank's deputy governor, Marja Nykänen.

"From the perspective of financial stability, Finns' increased indebtedness and, particularly, the increasing provision of long-term housing loans give cause for concern," Nykänen said in the statement.

As a solution to reduce future risks associated with economic crises, the bank suggested exercising macroprudential policies. According to the bank's lengthy definition, the main goal of macroprudential policy is to promote stability within the financial system as a whole.

Bank urges household debt-to-income caps

"The continuing growth in household indebtedness and slackening of the terms on new housing loans increase the need for new macroprudential tools. A debt-to-income cap (DTI) and limits on the maturity of housing loans should be introduced without further delay, in order to halt the loosening of loan terms," Nykänen said.

"The new macroprudential tools should be directed at credit granted both by the banks and by other lenders," she said.

Meanwhile, Nykänen noted that growing household debt was just part of the problem, saying that borrowing by housing companies was also on the rise, a situation which can distort the real costs facing prospective homebuyers.

While the proportion of households' mortgage for home purchases has remained stable over the past decade, the debt consumers have taken on for housing companies' loans has steadily increased during the same period, according to bank data.

"Housing company loans can blur house purchasers’ grasp of their overall housing costs and lure them into buying dwellings that are expensive relative to their ability to cover their debt and the maintenance costs of the property," she said.

Despite the bleak perspective on household economies, the central bank said that Finland's banks were in good shape and that their profitability grew during 2020, adding that recent reforms had helped to boost Finnish banks' abilities to operate globally.

"Finnish banks have adequate capital and have been able to lend to businesses and households during the pandemic," Nykänen said.

However, the bank also warned that Finnish banks were susceptible to risks seen across other Nordic countries, saying that rising housing costs were "magnifying housing market imbalances, particularly in Sweden and Norway."

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