What Determines the Price of Your Next Home?

​‒ In a free housing market, what mainly dictates the price development are the turns in the demand. In an urban area, the income level and the population and its structure, among other things, govern the demand. The supply, on the other hand, takes slow turns without big fluctuations, says economist Elias Oikarinen from the Department of Economics at the School of Economics.

Oikarinen has been studying the dynamics of the housing market for a long time. He says that there are many economic and political aspects which confuse the fundamental principle of demand and supply, and have an effect on property prices.

Firstly, geographical restrictions make the prices higher. He makes an example of Helsinki, the capital and the largest city of Finland.

‒ In Helsinki, the sea limits housing supply. The price level of the city can continue to grow eternally even in real terms, i.e., faster than inflation, if the population and the real income level keep growing.

High housing prices work as a counterforce to regional concentration and the population growth of the city. The housing market can, however, be manipulated and the price level lowered by public production, for example.

‒ In my opinion, it is important to ask if it is appropriate to build subsidized housing relatively more in the Helsinki metropolitan area than in the rest of the country and support the regional concentration by doing so.

Narrowing the Deductibility of Mortgage Interests Reduces Homeownership Rate

Academy of Finland appointed Elias Oikarinen as an Academy Research Fellow starting September 1. In his project, he is studying varied topical questions related to the housing market. One of his questions has to do with the effects of taxation. The deductibility of mortgage interests is one of the most burning ones.

Oikarinen’s view is that the lowering effect, which giving up the deductibility of mortgage interest payments in taxation has on the prices, cannot be seen unambiguously positive because it will raise the rent level. This differs from some views other Finnish economists have presented.

‒ Narrowing the deductibility of mortgage interests will to some extent have a lowering effect on the prices. This will keep the dwelling stock smaller than it would otherwise be which again will raise the rent level. From the investor’s point-of-view, the rental revenue will grow.

As the right to deduct mortgage interests narrows, it becomes more and more attractive to rent.

‒ This will make the homeownership rate lower than it would otherwise be. The rental market will become enlivened and the size of the privately financed rental market will grow.

Two thirds of the Finnish people live in an owned-occupied dwelling, which is of Western Europe average.

‒ It is popular because it is more profitable.

Oikarinen believes that if the tax benefit remains, owning will continue to be generally more attractive than renting.

‒ If taxation is neutral, there shouldn’t be any differences between the profitability of owning and renting. For the moment, there are image factors attached to owning property, which might not be there in the future and the two tenure types will not be valued different anymore.

Text: Taru Suhonen
Photographs: Janne, Jussi Matikainen