In RT's economic review of October, housing starts were predicted to decline in 2017. The reason is the assumption that the activity of various housing funds, which are already responsible for about a third of new high-rise apartment starts, will decline. I open this train of thought in more detail in this article.
Housing production turned to a clear increase in the summer of 2015 and has since risen to figures that were last seen at the beginning of the millennium. The increase in number of units has arisen above all as a result of the reduction in the average size of apartments. After the financial crisis, production has been focused on high-rise apartments and more recently on small apartments.
The change in the production structure is underpinned by structural and cyclical factors, of which I will focus on the latter in this article.
In the zero interest rate environment, the real estate sector has become even more interesting in the eyes of investors. Housing investment in particular has offered a clearly better overall return in recent years compared to interest rates. The importance of investors in the production of new apartments has been emphasized, as it is estimated that every third apartment building is created as a self-financed rental apartment. If state-subsidized ARA apartments are included, then the share of rental apartments in all new apartment building construction rises to an estimated 70 percent. The increase in housing production is a good thing, because new housing in growth centers is badly needed. But the possible temporary withdrawal of investors from the market can reduce the number of housing starts considerably.
What could reduce investors' willingness to invest in housing when interest rates remain at a low level? This can be seen from Figure 1, which shows the building permits granted to apartments and the completed apartments. Figure 1 shows that although housing production has clearly picked up, it is not yet reflected in completed apartments. It is therefore certain that during 2017 significantly more apartments will be completed on the market than in previous years. According to the August data, building permits had been granted annually for approximately 8 apartments, more than the annual level of completed apartments.
Figure 1. Building permits issued for apartments and completed apartments.
How does the growth of completed apartments affect the investor market? When ready-made rental apartments appear on the market at a rapid pace, there may be a shortage of tenants who can pay for a while. If there are a few empty months, it is easy to imagine that this will curb most of the desires to start new rental properties.
Thus, in terms of housing construction in 2017, the fateful question is how will the activity of housing funds and other housing investors fare? The current production level of around 35 apartments is quite capable of covering the long-term need, as long as the apartments are built in the largest growth centers. In the new production of apartments, efforts should be made to reach a steady and sufficient level of production and to minimize cyclical fluctuations. In this way, it would be possible to best meet the price of housing in growth centers. Let's hope that the rush of investors into the housing market that we have seen now will not end in a sudden withdrawal.
Sami Pakarinen
Chief Economist
Confederation of Finnish Construction Industries (CFCI)
The text was originally published in PARMAblog 7.11.2016.
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