Future Price Evolution, what do you think?

For those who are not aware of the flat price evolution throughout the past, you will learn that housing price follow a cyclical pattern. Boom are always been followed by bust.

Like in the previous boom, we had two price growth phase that lasted 10 years:
1979 until 1989 with a stabilization level established during the period of 1982-1986.

Similarly, we have had a boom that lasted (?) 10 years:
1997 until 2007 with a stabilization try around 2001-2003.

Now we have technically 5 possible scenarios.

+6% : an even more dangerous and destabilizing housing price bubble inflation (Wage, food inflation...)

+3% : a wish from Central bankers and politicians and most importantly a survival level for construction builder.

-10%: a soft landing

-30%: a return a natural equilibrium (economical expansion back to normal, income growth anemic)

-40%: a hard landing (economical shock, US in recession followed by Asian or BRICS Recession)

These scenarios will in fact be under the influence of many parameters that are beyond the control of Finnish Politicians and central bankers:

-ECB, US Fed monetary policy mistake
-Bad recession in the US

-Oil price over 100$, Euro over 1.50 on the dollar. Inflation higher than 3%.
-Recession in Brazil/Russia/India/China (BRIC, Emerging countries)
-Long term interest rates shooting up (inflation, strikes out of control)

Ordinary wage-earners can no longer afford to live in the Helsinki region

"Shortage of land pushes housing costs to among highest in Europe."

"In Belgium, for instance, which has twice as many inhabitants as in Finland, although the whole country is smaller than the Province of South Finland, people live in cheaper and more spacious accommodation than in Finland."

"In Finland, the population is increasingly gravitating toward the Helsinki region and other urban growth centres."

"We are getting near the point where ordinary wage-earners can no longer afford to live in the Helsinki region", says Anja Mäkeläinen, managing director of the building and housing construction foundation Asuntosäätio.

The high costs are getting to be an impediment for middle-income service sector professionals, such as nurses and bus drivers, to live in the Helsinki region.

The price of land has gone up even more in recent years than that of construction or of houses or apartments. Lujanen says that a "myth" prevails in Finland that the present prices follow the laws of the market economy."

Some taxes are beneficial and some are detrimental. For instance, in the United States, they understood long ago that unbuilt plots of land fit for construction should be taxed."

YLE on Finnish housing slowdown

YLE, a Finnish state channel, has shown on prime time a report on the state of the housing in Finland.

Watch the YLE Video (in finnish, but there are some nice Charts...)

In any case, Finland is not insulated as it is a global phenomenon.

Today in the US the number of existing home sales reach the 1999 level and still worse is coming.
"Sales of existing home sales in the US plummeted last month to their lowest annual rate since records began.This was the lowest level since figures on single-family homes and condo sales were collected in 1999...The so-called "jumbo mortgages" - loans which are over $417,000, have dried up. High-cost areas like California, where buyers are reliant on these mortgages, have therefore been hit hard.", reported the guardian.

In the video, it says that Spain, France and Ireland are currently experiencing a sharp slowdown. That should not surprise anybody (at least the one that are informed).

Finnish Banks Have Too Lax Mortgage Practices

"Finland's Financial Supervision (Rata) said in a statement on Monday 05 December 2005 that it was worried about the country's banks granting mortgages to customers unable to produce a down payment and lacking financial backing."

That was back in 2005. There were plenty of warning signs that have been completely ignored during the last 2 years. The financial system completely ignored the recommendation and went into granting loan to almost anybody (no savings, high level of debt relative to income, to young that just have their first job and no savings) and quite often over the value of the house itself (adding to the loan : Car, motor bike, boat, holiday etc...).

But then as recent as in September 2007, the FSA -Finland's Financial Supervision Authority is denying any wrong doing of the bank system:

"The FSA added a mortgage crisis similar to the current one in the US could not happen in Finland because unlike in the US, Finnish lenders were required to base their mortgage decisions chiefly on the borrower's solvency, not the size of security."

I will highlight "borrower's solvency" , what was the criteria? was it based on the solvency at a time of a low interest rate environment or based on business trick such as the one highlighted in the article "our-Finnish-sub-prime"

Mortgage holders exposed to mounting risks

Mortgage holders exposed to mounting risks

Indebted households are increasingly vulnerable to risks. More than 30% of Finnish households, and 60% of families with children, have housing loans.
Banks are granting large long-term loans (20–30 years) to personal customers with poor repayment capacity.

In addition, banks may extend unsecured card credits to households that have already run into debt.During inspections, the FIN-FSA has noted that collateral, and not customers' repayment capacity, too often seems to have played the major role for banks' decisions to grant loans.

"In evaluating requests for loans, banks calculate customers' cash flow coverage ratio but the programs available often set living expenses too low.
The loan amounts granted are frequently so large that customers are left with no buffers for unforeseen expense."

"Could the symptoms in the US housing market spread to Finland?According to the latest available information, the situation in the US housing market is coming to a head since credit institutions that have granted subprime housing loans to low-income borrowers have run into serious payment difficulties due to non-performing assets."

"At least two large banks, but also a number of smaller banks, that have been engaged in granting housing loans to households with very poor credit histories have announced that they have run out of assets."

"As a result of rising interest rates and slumping housing markets, the number of defaults by mortgage holders and loans taken in execution started to increase sharply towards the end of last year."

"A slowdown of economic activity in the United States would have an impact on the entire world economy and ultimately on the Finnish housing loan market."

Real Estate Market Cools Down

Real Estate Market Cools Down

Longer waiting periods for selling a flat are making both buyers and sellers of real estate more cautious.

The Mortgage Society of Finland is warning people of the risk of becoming trapped between two homes. The Mortgage Society is advising prospective buyers to sell their old apartments before attempting to buy new ones.

"It seems wise to sell off old property before investing large sums of money," says Mika Tulimaa, who followed a piece of old-fashioned advice and rented a flat while waiting for his old home to be sold.

Meanwhile, in the city of Oulu, cancellations on new building sites are up by fifty percent. The most common reason for this is that people have not been able to sell their old homes.

Agents draw attention to the importance of the price-quality ratio. If a flat is in good condition and the price is reasonable, a buyer can turn up very quickly. Overpriced apartments will naturally stay on the market the longest. However, the biggest obstacles to sales are costly building renovations.

To avoid the emotional and financial stress associated with being overburdened with debt, the Mortgage Society of Finland is urging buyers to be careful not to take on more than they can handle.