Tuesday, 6 May 2008

Prime Rate or Prime Trap ?

"OP-Pohjola Group Central Cooperative's Executive Board decided on 6 May 2008 to raise OP-Pohjola Group's OP-prime reference rate from 4.25 per cent to 4.50 per cent, effective 20 May 2008.

The decision was based on the rising trend in market interest rates. The prime rate was last revised in June 2007

How long would the other banks wait before raising their prime rates?

Nordea 4.25%
Sampo 4.25%
Aktia 4.25%
OP 4.25%
Pohjola 4.5%

"One housing veteran once said to me, never trust or take the bank low prime rate. When the main ECB interest rates will start falling, banks will drag feet to lower it"

A report from Bank of Finland, clearly highlight the fact that the housing borrowers are looking for the cheapest alternative, thus switching from 12 month euribor (4.9%) to bank prime rates (4.25%).

"Euribor rates lost some of their popularity as reference rates used in new housing loan agreements in March.

The shift was mainly in favour of prime rates, the share of which has increased clearly.

In March, these two reference rates were used equally 48% in new housing loans

I'm really wondering if a 0.5% can really make a difference??, if so then households are pretty highly leveraged which could explain why the saving rate has exploded in the past 6 months at a time where consumer confidence has plummeted.

I think a vast majority are still hoping that the housing will stabilize or at best follow inflation. That's most probably the reason why appetite for housing has not yet receded. Figures will show us that, a still healthy housing market, at least until end of the summer...

Symptoms have appeared in different forms, but no one can believe that a downturn could start ...

I stick to my prediction that company such as YIT, Ramirent are going to see their shares going back to 2003 level, a single digit level at around 3-4 euro.

These two companies are reflecting the housing bubble that has developped in the past 5 years as they show clear similarities as the nasdaq bubble or technology bubble...


Anonymous said...

I have been expecting banks to start raising their prime rate. I am now being charged 4,25% when the Euribor (3 month) is at 4,857%.

Even if they go to 4,50% this is lower than interbank borrowing. So banks that have lent out too much will be hurting! (My local bank seems to have more deposits than loans made so they should not be hurting too much from high interbank rates).


HousingFinland said...

Well I suppose their economist, like many others, bet that the ECB will follow the US and UK at cutting rates.

They bet in the beginning of the year that in April the ECB will lower the rates but they completely mistaken and the ECB didn't do past mistakes.

Of course they will have then dragged their feet...

More deposits than loan? it got to be a very small bank that didn't take didn't particpate in the housing boom during the past 10 years??

It's clear that if house price were to fall by only a few percentage, banks deposits won't cover the loss on the collateral... this is just a guess.

At the end the bank makes profit by lending money at higher rate..now it's clear that this startegy doesn't work and is a risky one...

And think about it, you paying back the bank 4.25% when current inflation is hoovering around 4%, where does the bank make profit amid a slump in stock market?

I think they are going to increase the prime rate by at least 0.5% to 0.75% and keep there during 2009 at a time when the ECB will cut rate thus not passing the interest rates cuts...

This scenario is based somehow on what can be witnessed in the US and UK, ones that are now experimenting the housing slump.

Anton said...

Aktia, seems to get under pressure too , they are rising their prime rate to 4.5% :

Keskiviikko, 07.05.08 16:01

Aktia nostaa prime-korkonsa 4,50 prosenttiin 21.5.2008

Aktia Säästöpankki Oyj Pörssitiedote vapaasti julkaistavissa
7.5.2008 klo 16.00

Aktia Säästöpankki Oyj nostaa Prime-korkoaan 0,25 prosenttiyksikköä
4,50 prosenttiin. Muutos johtuu kasvaneista inflaatio-odotuksista ja
markkinakorkojen noususta. Koronnosto tulee voimaan 21.5.2008.

Anonymous said...

Aktia has been behaving in a quite unstable way.

They had their prime rate at 4.5% , then few month later they lower it to 4.25% and now they put it back to 4.5%...

Anonymous said...

The loan is for prime + 0,6%, so they can still make a little money, but hardly enough for the overheads.

Yes it is a small bank, in an area that is depopulating so there has not been a lot of new houses going up!

BTW I don't see that Aktia's actions have been 'unstable' they are just responding to the market rates. If anything is 'unstable' it the market with the rates shooting up in December 2007, going down (mid-January and February) and now seem to be on a slower rise, although it looks like they are flattening out now.


HousingFinland said...

Aktia was the only Finnish bank one to change is prime rate up and down in the past 6 months...

Money market pressure are due to the fact that cheap debt is something from the past.

Banks need now to reward savers (as they need to rebuild their capital base). In order to do that, it means that borrowing rate will be higher in the years to come.

But sure we are now at an inflection point. no one knows which direction we will be going either with the economy, inflation.

so 2009, will more likely look like 1989 or 1999 , a year that saw a big change.

Anton said...

Woww for Ramirent you spot on... 22% drop in Helsinki Stock market...

Anonymous said...

"Nordea Prime Rate to be raised in Finland

Nordea will raise its Prime Rate by 0.25 percentage points to 4.50
per cent. The raise will enter into force on 1 June 2008.

Nordea Prime Rate is primarily used as a reference rate for housing

The decision is based on the development of the market rates."