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Inflation and rising interest rates have placed stress on households – what does the situation look like from the perspectives of example families?

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In recent years, inflation, rising interest rates and the tumult in the housing markets have tested different households in a variety of ways. Families with a high variable-rate housing loan and significant essential costs have faced the most difficulty. Statistics Finland’s experts examine the life of three example families.

The decrease in real purchasing power, the higher cost of housing loans and the deceleration of the housing markets have driven several households into a corner. The situation has tested different households in a variety of ways – depending on factors such as income, the type of dwelling, consumption habits and wealth, each of which shows significant differences.

While macroeconomic indicators offer an overview of households’ income levels, they can be criticised for summing all households together without showing any changes in the standard of living of different households. We will start this article by briefly describing recent general trends, after which we will examine the situation of three different imaginary families.

Statistics Finland’s Household Budget Survey produces data on changes in households’ consumption expenditure and on differences in consumption by population group. We have used these data to describe what each example family’s consumption consists of.

To further add international comparison data to the article, we selected the prices of key travel-related commodities, including food, in Sweden, the Baltic countries and Spain in the stories of the example families (knowing that not all Finnish people travel abroad).

Interest, purchasing power, confidence – households are being tested 

In 2022, inflation reduced households’ purchasing power at the quickest pace in 40 years. Inflation peaked in December 2022, when it was 9.1 per cent. After December, the increase in consumer prices has decelerated, with inflation being 5.5 per cent in September 2023. As income has increased more slowly than inflation, households’ purchasing power has decreased significantly. 

Inflation has shown considerable variation between different EU countries. It has been particularly rapid in the Baltic countries, in which Finnish tourists have found that food prices have nearly reached the level of Finland. According to the international price comparison, the total price level of commodities purchased by Finnish households in 2022 was the seventh highest in Europe, exceeding the EU average by 26 per cent.

As a result of rising consumer prices, the European Central Bank started to increase interest rates in the summer of 2022. The housing trade already peaked a little earlier in May 2022, after which the number of transactions started to decrease, with the prices of dwellings also falling. In July 2023, the prices of old dwellings in housing companies fell by eight per cent from the previous year in the whole country and by 1.4 per cent from the month before.

With regard to Finland’s largest towns, the prices of dwellings have fallen most in Greater Helsinki and the number of transactions has decreased significantly in both Helsinki and the country as a whole. In July 2023, the number of transactions involving old dwellings in blocks of flats and terraced houses completed through real estate agents decreased by 29 per cent year-on-year.

Housing loans placed the most significant strain on families living in larger towns, especially in the Greater Helsinki area.In terms of age groups, household-dwelling units with the reference person aged 35 to 44 most often had a housing loan.

The pace at which interest rates have increased has taken many households by surprise, and new loans have been taken out more slowly. As a result, households’ indebtedness ratio started to decrease in 2022. As loan expenditure is increasing, purchasing power is decreasing, and heating costs are rising, many households need to recalculate their expenses more closely.

In September, consumers were very pessimistic about their financial situation: the value of the consumer confidence indicator was unusually negative in all population groups. The elderly, retired, unemployed, uneducated or those with a low income were scarcely able to give a positive estimate or opinion of the financial situation.

High interest rates tightening purse strings – added strain from rising fuel prices 

Next, we will examine the housing expenses and other key costs of three example families, as well as the impact of price increases and the housing market situation on each family’s finances.

The examples include a family with underaged children and a housing loan (Korhonen), a young adult living alone in a rental dwelling (Nieminen), and a retired couple living in an old detached house (Virtanen).

The Korhonen family consists of two adults and two children. They live in a terraced house in Greater Helsinki and use a ten-year-old diesel car to commute.

The Korhonen family’s consumption mainly consists of basic living expenses, including housing, food and transport. According to the Household Budget Survey, housing and energy account for a total of 27 per cent of the consumption expenditure of a family with underaged children (19 per cent in owner-occupied dwellings), while transport accounts for 16 per cent and foodstuffs for 13 per cent.

The increase in housing costs has reduced the family’s purchasing power. The Korhonen family has a housing loan and a housing company loan for their new terraced house. The family has used payment-free months, but they are nearing the end of their limit. Financial expenses related to the housing company loan and higher interest on the housing loan may increase by several hundreds of euros per month.

According to the Consumer Price Index, interest on housing loans already increased by roughly 314 per cent between January 2020 and September 2023. With regard to other housing costs, prices of electricity increased by 32 per cent, basic renovation costs in owner-occupied dwellings by 27 per cent, and dwelling maintenance and repair costs by 16 per cent during the same period.

Because the loan burden is significantly higher than estimated in the Korhonen family’s budget, the family is considering a move to a more affordable owner-occupied dwelling or a rental dwelling. Selling a dwelling is a challenge in the current market situation. In the Greater Helsinki area, the prices of dwellings in terraced houses fell by 4.4 per cent a year in June, slightly more moderately than in other parts of the country.

What makes the situation a little better for the Korhonen family is that the prices of family dwellings have fallen more slowly in terraced houses than in blocks of flats. If the Korhonen family decides to move into a block of flats, they will find that the prices of family dwellings in blocks of flats in Helsinki are 8.9 per cent lower than a year ago.

In contrast, if the family moved into a rental dwelling, the median rent for family-sized dwellings (rental dwellings of three or more rooms) would be EUR 1,235 to 1,355 a month in Greater Helsinki.

In addition to the rising housing costs, higher fuel prices have a significant impact on the Korhonen family’s finances, as the family uses a car every day to commute. The price of diesel fluctuates due to changes in global market prices. In September 2023, the price of diesel was 37 per cent higher than in January 2020. Furthermore, the prices of car tyres have increased by an average of 21 per cent, servicing by 10 per cent, and insurance by nine per cent from the comparison period.

Food prices at Finland’s level in the Baltic countries, Sweden less expensive than before for tourists

Because the increase in housing expenses particularly reduce the purchasing power of families such as the Korhonen family, they can spend less on leisure travel. Many families with underage children prefer to travel to the neighbouring Baltic countries and Sweden.

However, travel to the Baltic countries has become significantly more expensive in recent years, as their inflation has been much higher than the EU average. According to Statistics Finland’s international price comparison, food costs only a few percentage points less in Estonia, Latvia and Lithuania than in Finland.

In contrast, Sweden is currently a more affordable destination than before, as the value of the Swedish krona has decreased significantly relative to the euro during the last 12 months.

Last year, total price levels were very close to each other in Finland and Sweden. Hotel and restaurant prices are roughly the same in Sweden as in Finland, similarly to the prices of food and non-alcoholic beverages. The price of alcohol is almost 30 per cent and that of tobacco a quarter lower in Sweden. Clothes and footwear cost roughly the same in both countries. In contrast, telephones and calls are a quarter more expensive in Sweden than in Finland.

Benefiting from the rental markets – savings from services

Nieminen, who is taking the first steps on his career path, lives alone in a rental dwelling. In the tumultuous markets of owner-occupied dwellings, living in a rental dwelling offers stability. Nieminen is also considering moving into a more suitable rental dwelling in Sweden or another European country, which is why Nieminen is monitoring the development of prices in these countries.

There is currently an oversupply of rental dwellings, one and two-room dwellings in particular, in Greater Helsinki. The rents of non-subsidised one-bedroom dwellings have only increased by 0.3 per cent a year in Greater Helsinki, which means that housing costs have not increased nearly as much as other living expenses in the region. During the second quarter of 2023, the median rent for one-room dwellings was EUR 723 to 750 a month in Greater Helsinki.

Even though new dwellings are being built in the markets, granted building permits fell by 35 per cent from the previous year. Although the situation may change during the next few years, the market is currently favourable for renters in Finland.

According to the Consumer Price Index, rents increased in the whole of Finland by 4.5 per cent between January 2020 and September 2023. The moderate increase in rents can largely be explained by the very small number of rent adjustments. Inflation started to increase properly in the middle of 2022 and is always reflected in rent adjustments with a slight delay. Living in a rental dwelling therefore appears more affordable than in an owner-occupied dwelling in the current situation. 

Compared to families with underage children, Nieminen has more time for travel and various experiences. According to the Household Budget Survey, housing and energy account for a third of a young adult’s consumption (15.0 per cent in rental dwellings and 15.4 per cent in owner-occupied dwellings), while food accounts for roughly a tenth, transport for 15 per cent, and hotels, cafés and restaurants for around six per cent.

In other words, services play a significant role, and as prices have increased, Nieminen has tried to save money by selecting more affordable services. The prices of the products and services preferred by Nieminen increased as follows between January 2020 and September 2023: streaming services and other pay-for-view TV services by nine per cent, accommodation services by 14 per cent, fast food by 25 per cent, domestic train tickets by almost 17 per cent, and long-distance bus tickets by 20 per cent. 

Trying to survive in a detached house – the housing market deceleration complicates changing the type of housing

The Virtanen family, consisting of a retired couple, spend their summers in Finland, living in a detached house outside the Greater Helsinki area, and their winters in Spain.

The retired couple’s consumption differs significantly from younger families, focusing on expenses arising from their owner-occupied dwelling (housing and energy 39 per cent, owner-occupied dwelling costs 28 per cent), travel (transport 12 per cent) and the treatment of basic illnesses (health six per cent).  

According to the Consumer Price Index, the price of electricity in an electrically heated detached house increased by 32 per cent, and that of international flights by as much as 58 per cent between January 2020 and September 2023. In contrast, the prices of prescription medicines have remained almost unchanged.

The most significant cost item associated with housing in Finland is the price of electricity, which is why a potential increase in heating costs will bring along financial uncertainty. In addition, real estate tax may increase at some point. The couple is considering how long they can live on their own and whether they should move into serviced housing. 

Several parts of the Virtanen family’s old house should be repaired. In 2021, basic renovation costs increased due to problems associated with the availability of raw materials, and the price increase makes the Virtanen family unwilling to invest in repairs.

Detached house transactions have decreased by almost a quarter year-on-year. The Virtanen family is unsure of whether they should sell their house in this market situation. The price obtainable from a detached house is also a cause of concern. In 12 months, the prices of detached houses have fallen by 9.7 per cent outside the Greater Helsinki area and by 9.2 per cent in the whole of Finland.  

Flights are more expensive, but life in Spain is more affordable

As many pensioners head to Spain for the winter, the increase in international flights by as much as 58 per cent hits them hard. When the coronavirus pandemic affected the profitability of airlines, they were forced to adjust the prices of international flights and their service range.

Then again, living is more affordable in Spain than in Finland. The prices of food and non-alcoholic beverages are 13 per cent, those of clothes a quarter and those of footwear 18 per cent lower in Spain. Hotels and restaurants cost 1.5 times more in Finland than in Spain, while the prices of alcohol are double and those of tobacco almost double.

In contrast, energy is almost a third and healthcare nearly a quarter more expensive in Spain than in Finland. Compared to Finnish prices, telephones and calls also cost more in Spain, being roughly nine per cent higher.

Microeconomic calculations in addition to macroeconomic indicators

Macroeconomic indicators that represent households give a slightly contradictory picture of the current trends. Employment has remained at a good level. In contrast, the increase in wages was slower than inflation for a long time, as a result of which households’ real purchasing power has decreased considerably. The savings accumulated by households during the coronavirus pandemic have dwindled, and their savings rate started to decrease in 2022.

As our example families’ situations indicate, there are significant differences between various households. If a household has a large housing loan without any interest hedging and various necessary day-to-day expenses, the joint impact of rising interest and inflation rates may have been devastating. Then again, there are debt-free households with moderate housing and other costs.

One of the strengths of macroeconomic statistics is that they summarise a large volume of data using chronologically and internationally comparable figures. In addition, however, we need various other indicators to monitor the development of households’ income.

Under the OECD and Eurostat, the aim for several years has been to develop the household distributional accounts, in which the macroeconomic level of the national accounts is divided into income quintiles or deciles based on microeconomic data.

Eurostat has already published these calculations as experimental statistics, and a methodology project is also underway at Statistics Finland to identify the possibilities of producing the data in Finland. This has also come to the fore in conjunction with the updating of the System of National Accounts (SNA), and these distributional accounts are expected to be included in the next version of the guidelines, at least as a recommendation.

This article has also been published in Finnish.

The authors work as Senior Statisticians in Statistics Finland’s Information and Statistical Services.

Anu Rämö and Pertti Kangassalo also participated in the planning of the article.