Friday, 11 July 2008

Alea iacta est


Consumers are still borrowing for housing purchase, and so are the banks opening the coffers wide open. No sign whatsoever of a credit slowdown which seems to be in sharp contradiction with the consumer confidence survey.

"The amount of housing loans raised increased further in May

In May 2008, households raised new housing loans to a total value of EUR 2.3 billion compared to EUR 2.1 billion in April. The average interest rate on new housing loans was 5.00% in May, up 0.12 percentage point on April.
" Bank Of Finland

At the end, this wall of money flooding the consumer space is pushing prices higher in all fields. Inflation is outrageously high, shops are passing cost to the consumers (let's call them "lamb"). Indeed lambs are purchasing without questionning excessive prices set by retailers such as electronics (com'on lambs, purchase online from German shops, it will save you hundreds of bucks) and food. Indeed Finland is where you find the most expensive ... well you name it.

Hidden cartels, Financial regulators asleep and lack of competitions (or municipalities pressures not to have such thing and let some "families" or business group to rip thousands of profit on the back of the "lambs") are making this economy unprepared for what could be the worse economical storm since 1990...

"Finns and Danes share the dubious honour of having to pay the most for their consumer electronics in the EU, according to data released by Statistics Finland on Tuesday."

"Finnish food prices are among the highest in Europe at double those in Germany, Finnish regional daily Aamulehti reported Friday."

Talking about Sleepy Financial regulators, how many time warning were raise in this blog, concerning easy credit, especially Flash credit (or obtained through mobile SMS). The regulator have only spoken but not acted...therefore have been completely useless if not uncompetent....

"Veli-Pekka needed cash in a hurry to pay off gambling debts. So he started texting.

The Zamboni ice-resurfacing machine driver used his mobile phone to contact Finland's text-message lenders. The only catch was he had to pay fees equivalent to an annual interest rate of as much as 1,600 percent."



Since banks open wide open coffers at a time of unprecedented credit crisis in the US (the worse since the 30's), and with Europe at the brink of a recession, Finnish economy continue blindly to ignore the impact it will have. Commercial realestate are mushrooming all around the places, same for Shopping malls, so no wonder why construction cost doesn't fall...

"Building costs rose by 4.5 per cent from June 2007 to June 2008. Labour costs in construction went up by 4.4 per cent, prices of materials by 4.1 per cent and those of other inputs by 5.8 per cent year-on-year."

A sharp contrast with Spain, Ireland and U.K. where salaries in the contruction sector have been slashed by more than 10%, while the number of layoff in this sectors is the amount of hundreds of thousands...

Never mind, signal are gathering pace. The economy is now sharply slowing down, no doubt about it....

"According to Statistics Finland, the volume of new orders in manufacturing was 23.2 per cent lower in May 2008 than in May 2007. In the January to May period, new orders in manufacturing decreased by 2.4 per cent year-on-year."


The problem with that, is the Finnish economy should have had higher interest rates much earlier and even now they are too low. The economy should have been allowed to slow in order to allow comsumer deleveraging few years ago. Instead you have massive indebtedness....

"Households' financial position remained in deficit in 2007. Debts continued to grow briskly and indebtedness, i.e. proportion of loans relative to disposable income, rose to 103 per cent. Debts went up by EUR 9 billion during the year." Statistics Finland

So what to think about all that? well 2009 is going to be a very hard time for the Finish households ...and the economy. Should unemployement rates increase, the effect will be devastating.

Quite many companies have already deserted the Finnish housing market and heading to places where growth has not yet fallen from a cliff...

" Sponda aims to finance the company's growth in Russia by selling some of its property in Finland."

Housing prices will go lower no doubt about it, by a mere few percent (5-6%) next year unless the worst happen..the economy slow much more than anticipated and unemployement pick up much more than Bank of Finland models are telling us...a dark reminder of 1989...

...the dice has been thrown....

6 comments:

Anton said...

Regarding Text message lenders, what do they bring to the society if not distress and bad lending practice.

Their business model is only to profit from vulnerable people.

Banks lends money and help the economy from functionning and allows business to be created....

So what are the regulators waiting to shut those type of businesses? this is not innovation, it's destruction of capital....

Andrew said...

"Households' financial position remained in deficit in 2007. Debts continued to grow briskly and indebtedness, i.e. proportion of loans relative to disposable income, rose to 103 per cent."

Why is this high? or a problem?

What does the figure actually mean?

If a family earns 50,000 after tax and their debts are 51,500, nobody would think that a problem if the debt payback was spread over 25 years.

On the other hand if you earn 20,000 and you have credit card debt of 10,000 its something different.

So what do the figures mean?

Just more home ownership or something questionable?

HousingFinland said...

The figures are high for many reasons, but probably the most important are the fact that mortgage rate in Finland are based on variable rates (Euribor rates). Another reason, is the fact that banks have been lending on pretty weak collateral and to almost anybody who wanted to have a loan (due to competition and a search of quick profit in begnin economical environment)

This is all fine when rates are stable and low as well as having a continuous housing price growth...we know it was a pure utopie. House price were inflated because of low interest rates and deterioration of lending standard.

The figure means as well that Finnish -as a whole- are not anymore able to save since all their earning goes into servicing the debt and this in a inflationnary environment i.e food and oil...

This is a problem for banks as in order to lend they need the adequate funding which they get through saving and other means...if no saving then lending will be more discriminating unless they can use exotic products to fund themselves ..the hic...is that this market has collapsed last August 2007(CDOs etc...)

My guess is the situation will get worse in 2009 when house price will lose significant ground thus pushing into the red the bank collateral. So they will put a brake in the fast lending we have witnessed up to now thus accelerating the fall of house price and , this, at a time of a global economic slowdown....

Andrew said...

Thanks for the answer.

I have been looking to buy a house in Finland for about a year now. I am seeing signs that few houses are selling quickly and some are falling in price. Additionally I have talked to two bank lending 'specialists' locally in the branches and they both volunteered the market was now likely to be past its peak and they needed to be cautious about lending.

Unless Finland is living in a world of its own i expect that by the Autumn things will begin to become much clearer - my feeling though is the catalyst is events outside Finland rather than the Finnish situation itself.

HousingFinland said...

I think it will be wiser to wait at least another year to get a clearer view of the housing situation.

Remember if price start to fall, it won't be instantaneous and most probably be in the length of 2-4 years.

In any case, buying a house is solely your decision but just buy something you like, can afford and well located. Do not buy because other do and take a long thought on this decision as it can have big implication on your finance and indirectly affecting your quality of life.

Historically, it has never be good time to buy a house before a new economical cycle has started...The signal to buy most propably will be after the ECB finish with interest cut...knowing that at the moment they might not have finished to increase them...

In fact the most likely scenario that will happen is to make again first time buyer participate in the housing market. While they will see their salary raise by 3-4% in the next few years, housing price will move downward until affordability is met...then housing will stabilize.

Andrew said...

You have to wonder though about traditional ideas of house price stickiness. Falls in the UK USA Spain and Ireland have been very very rapid compared to historical falls.