Nordic housing market risks can affect Finland’s economy

Abstract

The Bank of Finland has been monitoring Nordic real estate market risks for a considerable time. There are substantial vulnerabilities associated with household indebtedness and residential property prices in the Nordic countries, and lending to the real estate sector by Nordic banks is high. Our analysis shows that the Nordic countries' financial stability risks also represent a risk to Finland’s economy. A connection exists between the rise in household debt in the other Nordic countries and tail risks in the Finnish economy, i.e. the elevated probability of significant reductions in total output. The risks in the real estate sector have been dampened using macroprudential instruments, but the European Systemic Risk Board’s latest assessment suggests this is not yet sufficient.